Bridge loans: When to use one
Finding a new home can be a process, but sometimes you find the right home in the right location at the wrong time.
Sure, you may be emotionally ready to move, but if you’ve already found a new home and you’re still waiting for your current home to sell, you may feel financially stuck.
In need of funds immediately!
It’s tough to buy a new home when you’re depending on selling your old home in order to afford the down payment or closing costs of that new home.
You may be feeling a lot of pressure, especially if the seller of the home you want is requiring a fast close and you don’t necessarily have the funds available immediately to make it happen.
While timing is everything, time isn’t always on your side.
That’s where a bridge loan can help.
Bridge loans are convenient!
You can use a bridge loan to help close on a home quicker and even make your bid on that new home more attractive to the seller.
Essentially, a bridge loan is a type of short-term loan. Just like the name implies, you’re bridging the gap of buying and selling a home at the same time.
How much can I borrow?
That’s up to your lender. Generally, you can usually borrow up to 80%.
What’s the interest rate?
Here’s where things get interesting. Sure, a bridge loan is good way to get out of a sticky situation, but that convenience comes at a price.
The interest rate WILL be higher on a bridge loan than what you’d get with a conventional loan. The lender knows they won’t be collecting payments from you long-term, so they need more interest upfront to make it worth it worthwhile on their end.
Rates do vary, but typically bridge loans are pricey.
What about additional fees?
There are other fees to consider, just like the closing costs with a traditional mortgage.
- Administration fees
- Appraisal fees
- Notary services
- Title policy
- Origination fee
Because bridge loans only work for up to one year, you’ll probably have to pay all of those fees again when you go to get your new mortgage.
The key, of course, is to make sure you sell your current home before your bridge loan comes due.
There are definitely some positives, though.
- Faster financing
It’s usually quicker to go through the process and close on a bridge loan than it is with other types of loans.
With this type of loan, you don’t necessarily have to wait for your old home to sell in order to afford your new home. Sometimes, too, sellers like offers that aren’t tied to the sale of another home.