Are you looking to move in 2021? Then you might have heard of something called a bridge loan. People often seek out these types of loans to purchase their new house before their current home sells.
A bridge loan sounds like an easy fix when you’re temporarily strapped for cash. However, these loans do have their risks. Bridge loans are prevalent in specific areas of the real estate market, but before you get one, there are a few things you should consider to make sure it’s the right decision.
The Balance explains what you should know about bridge loans.
What Are Bridge Loans?
Bridge loans are short-term loans financed by your current residence. It helps “bridge the gap” between the selling price of the new house and mortgage if you have yet to sell your place before closing. Essentially, you borrow the funds from the down payment on the new home before you sell the old one.
Comparing the advantages and disadvantages of this type of loan will help you determine if getting one is in your best interest.
Advantages Of Bridge Loans
If you get a bridge loan, you (the buyer) can use the equity in your current home to purchase a new one right away. This keeps you waiting for someone to buy your old house. In addition, many lenders don’t require borrowers to pay monthly installments right away, so you have more flexibility to pay when you can afford it.
Not only that, but you can eliminate the uncertainty that comes with selling and proceed with buying a new place if you’ve submitted a contingent offer to purchase and the seller gives a notice to perform.
Disadvantages Of Bridge Loans
Bridge loans sometimes cost buyers more in interest compared to a home equity loan. Usually, the former has a 2% higher rate than the latter. Also, the thought of paying for two mortgages that accumulate interest can be a burden for some buyers. If your house sits on the market for a long time, this could add even more stress.
How Do You Use A Bridge Loan?
Some lenders have specific credit score requirements and debt-to-income ratios for bridge loan applicants, but not all. As The Balance explains, most decisions are based on a “does it make sense?” model. The element that mandates restrictions is the long-term financing secured on the new residence.
Several lenders that offer conforming loans omit bridge loan payments for eligibility reasons. You can qualify to purchase the move-up home by totaling their current monthly mortgage to the new home’s mortgage cost.
Most lenders approve borrowers on two payments since many are still paying off their current home mortgage. You will probably close on your new house before you sell your old one, so hopefully, you will only technically own both residences for a brief period.
What Fees Comes With Bridge Loans?
Like most loans, bridge loans have different rates and fees depending on where you live, the lender, and interest rates.
For instance, you could get a bridge loan and not have to make monthly payments for four months, but the interest it accumulates will be due when you sell your house. In addition, administrative, escrow, title policy, wiring, notary, and other types of fees can differ considerably. Most bridge loans charge an origination fee, which is determined by the size of the loan.
Typically, home equity loans are more affordable. However, bridge loans provide many more advantages, depending on your situation. Not only that, but some lenders won’t approve applications for a home equity line of credit while your house is up for sale.
If you’re strapped for cash and your current house is still on the market, you can cover the cost of your next home’s down payment with a bridge loan or home equity loan. Whichever decision you make, it may be in your best interest (and a smarter financial move) to sell your house before purchasing a home.
Consider what your next move would be if you have trouble selling your house because you don’t want to be stick with two home loans. However, if you’re confident your house won’t stay on the market for long, or you have a backup plan, you are less likely to experience a contingent offer.
- Weintraub, Elizabeth. “Explore the Workings of Bridge Loans.” The Balance, 15 Jan. 2020, www.thebalance.com/what-are-bridge-loans-1798410.