While the benchmark for a down payment on a house has been 20% for many years, the truth is that many homeowners don’t put that much down. Whether it’s because they’re upgrading to a bigger home or because they just don’t have it, they need to find alternative solutions. That’s where bridge loan lenders have come in.
Understanding Bridge Loans
Bridge loans are temporary loans that cover the expenses that your mortgage can’t cover. Whereas a mortgage can be repaid over decades, a bridge loan is for a smaller amount and needs to be repaid faster.
These help home buyers that are upgrading to a larger or more expensive home and first-time buyers who don’t have the money to cover their down payment and closing costs.
Bridge loans come with costs and benefits that home buyers should know before they sign on the dotted line.
Costs and Benefits
One of the main benefits is that home buyers can pay for their down payment on a new home before putting their existing home on the market.
It also keeps home buyers from worrying about those first few payments after they’ve bought a home. The headaches that come with trying to juggle a sale and a purchase at the same time is often not worth it to many homeowners. Some homeowners will stay in an inadequate older home to avoid stress.
Applicants for bridge loans should know the terms aren’t as favorable as those of a mortgage. Since mortgage lenders make their money back over the decades, they offer low-interest rates. Bridge loan lenders, in contrast, charge much higher rates.
Handling both mortgages and bridge loan interest is too much for some borrowers, so make sure you will not be overwhelmed before taking one on.
Use Equity Immediately
When you buy a home using a bridge loan, you can use the equity from your current home to buy a new one as soon as you need to. Waiting for a home to sell is stressful and unnecessary thanks to these temporary loans. The wait could leave you and your family in an uncomfortable limbo that adds stress to work or school.
With a bridge loan, you don’t have to make your monthly payments immediately. If you’re waiting for cash flow to increase or switching jobs and moving homes, the few months where you don’t have to think about payments is comforting.
If you make an offer with a home sale contingency, some sellers may not like it. They might not want to worry about whether you can sell your existing home when they want to focus on their own home purchase. Bridge loans offer more freedom than many middle-income home buyers might otherwise have.
Consider the Fees
The rates you pay for your bridge loan will depend on your lender. Since interest rates can fluctuate, you need to watch where the market is before you apply.
Expect to pay higher interest rates and fees on a bridge loan. Interest rates for bridge loans can vary greatly but are generally about 2% higher than the average fixed-rate loan. Generally, bridge loans fees will amount to an additional 2-3% of the loan amount.
While many bridge loans might give you three or four months of no payments, interest will accrue and will all be due when it comes time to repay your loan balance. Sometimes the interest is due when the sale of your existing home occurs.
A home equity loan will be less expensive than a bridge loan but there are some additional benefits offered with bridge loans. Check to make sure that your home can be listed on the market when you’re applying for a loan. If not, that could be a frustrating restriction.
How Are You Funding An Upgrade?
If your home hasn’t sold yet, getting the money for a larger or better home can be a real pain. Paying for the down payment if you’re already close to your limit on your mortgage is a challenge for many home buyers.
Most home buyers have their mortgage calculated based on their earnings and go to the limit of affordability. If your home hasn’t increased in value by leaps and bounds or you haven’t been promoted since you bought your home, you can’t take on two mortgages.
That’s why a bridge loan makes financial sense. While the terms aren’t as good as a standard mortgage, lenders know that you need help. Rather than being without a home between when you sell and when you buy, bridge loans literally bridge that gap.
If you’re looking for other options, consider a home equity line of credit. If you’ve paid considerable equity in your home, you could take out a line of credit to borrow against instead of a bridge loan. You could also use that money to build in some upgrades instead of buying a new home.
Bridge Loan Lenders Play a Vital Role in Helping Homeowners
Homeowners who want to achieve their goals of building wealth and having their dream home rely on bridge loan lenders. As an increasing number of lenders have gotten into bridge loans, there are now more options for borrowers than ever.
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