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What are Bridge Loans?

Posted by admin on July 18, 2022
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What are Bridge Loans?

If you are trying to relocate and own a home, you might put it up for sale. But you might not be getting the offers you were hoping you would receive for it. And if you’re rushing to relocate, this is terrible news for you. Luckily, that’s where bridge loans come in.

Bridge loans are loans in which you use the borrowed funds to pay off the rest of your mortgage and put a down payment on your house.

There are various reasons why someone would want to take out a bridge loan and several benefits to the borrower.

In this article, we’ll examine what exactly comes with a bridge loan and what circumstances you should pull one out.


Why and When You Should Get a Bridge Loan 

Bridge loans are primarily for home sellers who are in a sticky situation and can’t sell their homes as fast as they want to. Not only that, but they are also hoping to relocate quickly. 

Either because they are moving to a new part of the country for employment or because they want a particular home and are afraid another buyer will come along and scoop it up before they can. 

And for these people, there’s a lot that bridge loans offer. 


Benefits of Bridge Loans

Lets You Put a Down Payment Without a Sales Contingency

If you’re trying to buy a house and offer your lender X amount of dollars for a down payment, but only if you sell your home first, the lender might reject your offer.

This scenario will especially happen if the local market is not in your favor. Having a bridge loan lets, you put down a fixed amount of dollars as a down payment and helps you clear your old mortgage to start a new one.


Skip the First Month’s Payment

Many bridge loans come with this exciting clause, which takes a huge burden off your shoulders. As a result, you have more time to concentrate on selling your old home, and you won’t have to worry about making a significant payment toward your bridge loan.


Potential for Interest-Only Payments or Payments Deferred Until You Sell

More than a few bridge loans offer interest-only or deferred payment options. Interest-only payments mean a borrower only has to cover monthly interest charges. But remember that once the term is through, a balloon payment is usually needed to pay down the remaining balance.


With deferred payments, you generally agree to put off the loan payment until a later date, once you’ve sold your home. 

If the bridge loans you have come across do not offer either, ask your lender if they would be willing to provide these options. Don’t be afraid to negotiate with the lender so that you can get the best deal possible on this short-term loan.


Downsides of a Bridge Loan

Higher Interest Rate 

Sadly, there’s no way around this. Since this is a short-term loan, you will have to pay a higher interest rate. Lenders understand that you will only have the loan for a short time. However, the quicker you pay this loan, the less you’ll worry about the interest.


Lenders Don’t Often Extend Bridge Loans

Unfortunately, lenders don’t typically extend bridge loans since the loans are short-term. There are some exceptions, however. For example, some lenders will renew your bridge loan if you also finance a mortgage with the same lender.


Failure to Secure a Sale Can Lead to Foreclosure 

When you get a bridge loan, you put your old home as collateral, and if you cannot pay back the loan in the amount of time you agreed to, you could lose your old home to your lender. You are still responsible for the debt if your home doesn’t sell. Ultimately, you will be paying three loans: the two mortgages on the houses and the bridge loan.


Some Final Words on Bridge Loans

Overall, if you’re in a good position in the housing market, need to relocate fast, and know you can afford a short-term loan, you should consider a bridge loan to help you better deal with your situation.

On the other hand, if you’re in a local, not-so-decent market and you don’t think you can afford the high-interest rate that comes with this loan, you might want to consider other alternatives before rushing into a bridge loan.

After all, there is more than one type of loan you can pull out to help with a down payment, but they might not have the benefits that a bridge loan can offer you.

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