Bridge Loan Review
Bridge Loan Review:
What Is A Bridge Loan?
The bridge loan is a short term loan taken by a borrower against their current property to finance the purchase of a new property. It’s typically good for six months, but can extend up to 12 months. Many bridge loans have an interest rate of approximately 2-precent above the average fixed-rate product. Generally, a bridge loan is taken when the borrower wants to upgrade to a bigger home, and hasn’t yet sold their current home. This type of loan bridges the gap between the time an old property is sold and a new property is purchased.
How Does A Bridge Loan Work?
A bridge loan can be structured as a second loan on top of the existing liens, or to completely pay off the existing liens on the current property. In the first case, a bridge loan is opened as a second mortgage, and is used only as down payment for the new property. While in the latter case, once a bridge loan has paid off all the existing liens on the current property, the excess payment is used as down payment for the new property.
If you select the first option, you’ll make payments on your old mortgage and the new mortgage attached to your property. This can stretch your budget. Therefore, ensure that you are able to manage such payments for a year if necessary. On the other hand, if you select the second option, you won’t make monthly payments on your bridge loan. Instead, you’ll make mortgage payments on your new property. Once your property sells, you’ll use the proceeds to pay off the bridge loan, including the remaining balance and associated interest.
Many consumers don’t use bridge loans because they aren’t necessary during hot markets. For instance, if your property sells within a month in the market, a bridge loan isn’t necessary. Today, bridge loans can become popular because sellers experience difficulties in unloading their properties.
Is A Bridge Loan Risky?
Many critics find a bridge loan to be risky. There’s no guarantee that the old property will sell within the allotted period of a bridge loan, though the borrower takes on a new loan with higher interest rate. However, a borrower doesn’t need to pay interest in the remaining months if the old property sells before the term of the bridge loan is complete. But watch out for penalties of prepayment that hit if you pay the bridge loan too early.
Do plenty of research before you sell your property to know prices and how long properties are listed before they are sold. If the market is strong, you don’t need a bridge loan. However, if you need one, be aware your property could go unsold for a period of six months, or even longer. Therefore, negotiate terms that allow for a bridge loan extension if necessary.