Bridge loans are a popular choice among home buyers as they allow them to take a loan against their current residents to make a down payment for the new home. Therefore, a bridge loan serves as an excellent choice for those who wish to purchase a new home before acquiring funding from the sale of the old property.
Also, it is a great financing option for businesses that need to cover their operating expenses while waiting for long-term funding.
When a bridge loan is taken for real estate, it requires the borrower to offer a current home or asset as collateral for the debt. Also, the lender expects the borrower to have at least 20% equity in their home.
The bridge loans come with higher interest rates and last only between 6 months to a year. Thus, they serve as the right choice for the homeowners willing to sell their homes quickly.
Bridge loan- What is it?
A commercial real estate bridge loan is an excellent source of financing one can acquire for the short term. It is a perfect choice for businesses and homeowners as it gives them the benefit of borrowing money for up to a year.
Bridge loans are generally secured by collateral like the home or assets of the borrower. They come with an interest rate between 8.5 % to 10.5%, which makes them more expensive than long-term and traditional financing options.
However, it is the fast and easy underwriting process of bridge loans, making them a great choice.
How does a bridge loan work?
Generally, the homeowners decide to purchase a new property before selling the current one. However, it can be difficult to secure a contract to sell the home first and then close the deal on the new one within the same period.
Besides this, it is challenging for the homeowner to pay for the new home’s down payment until they have received the finance from the current home sale. In such instances, the homeowners consider taking a bridge loan against their existing property to cover up the down payment for the new home.
The borrowers can communicate with a lender to get the loan amount for 6 to 12 months. It will help reduce the time between the purchase and sale of a property. Here the borrower has to offer collateral which is his property, as a security for the loan.
Once the borrower has successfully sold his first home, he can use the money to pay off the bridge loan and only left with the mortgage of the new property.
However, if the borrower fails to sell the home in the given time, he must pay for the first mortgage, the new home’s mortgage, and the bridge loan. It makes bridge loans a risky option for those who aren’t likely to sell their home quickly.
When to take a bridge loan?
The bridge loans are a preferable choice for homeowners willing to purchase a new home before selling their current property. The borrower can use a part of the bridge loan to clear off their existing mortgage, while the rest can use as a down payment for the new home.
Similarly, the homeowner can use the loan as the second mortgage to cover up the down payment for the new property.
A bridge loan is right when
- You are eyeing a new home and are in the seller’s market wherein the houses sell fast
- The new home seller isn’t ready to wait for the sale of your current home.
- You have no means to pay for the down payment of the new property unless you sell your current home.
- You want to close your new home’s deal before finding a good buyer for your current home.
- You aren’t scheduled to close the sale of your home until closing the deal for a new home.
The business owners can use bridge loans to take advantage of the current real estate opportunities for funding some short-term expenses. The business owners can contact hard money lenders to acquire the loan by keeping their property as collateral.
But remember, search loan charges higher interest rate than the other business loans. But they can be suitable when
- You want to cover up the operating expenses until you secure long-term financing.
- You want the funds to acquire real estate property quickly.
- You want to take advantage of a limited-time offer present on business resources and inventory.
Bridge loan cost
Bridge loans are considered the fastest and convenient way of acquiring temporary financing when you wish to purchase a new house or a real estate property. Still, you haven’t sold the current property. However, such loans are more expensive than the traditional options.
The interest for bridge loans depends entirely on the creditworthiness and loan size, but generally, they will range between 3.25% to 8.5%. While the appeal of business bridge loans is higher and ranges between 15% to 24%.
In addition to paying the interest on the loans, the borrowers are required to pay closing costs and legal administrative fees. The closing price and fees generally for bridge loan ranges between 1.5 % to 3% of the total loan amount, which can include.
- Appraisal fee
- Notary fee
- Administration fee
- Title policy cost
- Loan origination fee
- Escrow fee
Types of bridge loan
The variations one can find in bridge loans are typically related to the range of terms the lenders use according to the borrower’s financing needs and creditworthiness. Thus, this means the bridge loans aren’t classified. However, they often vary in repayment method, interest rate, and loan term.
Can handle the repayment of interest for bridge loans in several ways. While some lenders ask the borrowers to make monthly payments, the others take lump-sum interest payments made at the end of the loan term or taken out from the total loan amount at closing. Can handle the repayment of interest for bridge loans
Bridge loan pros and cons
- Offers immediate financing to the borrower
- Offers great flexibility when purchasing actual state
- Faster underwriting, application, and funding process than the other financing options.
- Higher interest rates than the other financing
- Not an option for everyone as the lender wants the borrowers to have at least 20% equity on the current property.
- The borrower needs to offer a property as collateral to acquire the financing.
- The borrower is expected to pay the debt service besides the current mortgage.
A bridge loan can offer significant advantages, especially when one needs financing on short notice. Using the loan, the borrower can make a purchase easily and quickly. However, there is no one way to find if the bridge loan is the right choice.
Given the higher interest rates and other aspects, one needs to consider their requirement and decide if the bridge loan is correct. If you think a bridge loan is the best for you, you need to contact a suitable lender for the best assistance.
Private Capital Investors is a reputable firm that can offer new great deals and offers for your bridge loan. With them, you can acquire the loan in the shortest time possible. Contact them today to get the finances you need for your purchase.