Bridge Loans – A Complete Overview
This blog highlights the term “Bridge Loans” and all the things that you need to know before choosing this loan.
Have you ever wondered what are the options for you to finance your home repayment?
You will say “yes, Home Loans”. Yeah, you are right. But there is a better option for you to choose.
Bridge loans are short-term loans that are used during the transitionary period. It means that if you are moving from one house to another, then you can take the help of this short-term credit. Homeowners who sometimes have to relocate near their workplace should use this.
The loan is short-term and it varies from six months to three years of repayment. And like all the other mortgages they are secured by your current home as collateral.
So, how does bridge loans work?
It is also known as interim financing, gap financing. It generally fulfills the gap of finance during those times of crisis. Both corporations and individuals can customize the loan according to different situations.
The bridge loan allows the homeowner to take some leverage to buy a new house while waiting for the current house to sell. Borrowers use the equity of the current house as a down payment for the purchase of a new home. This gives the homeowner some extra time and relief from stress for the time being.
This loan carries a high rate of interest as compared to traditional loans like Home Equity Line Of Credit (HELOC). People who haven’t paid off their mortgage end up paying two payments- one is a bridge loan and other is for a mortgage until the home is sold.
Now, we will see some examples to get some more clarity.
When Olayan cooperation wanted to purchase the Sony building in 2016, they took the bridge loan from ING capital. They got quickly approved and Olayan’s cooperation managed to seal the deal of buying Sony building on time. This loan helped them to cover up the short-term expenses like the cost of purchasing. So that they become financially sound in the long term.
So, you would be thinking, “why don’t they opt for traditional loans?”
Right, so here is the answer. I have compared them right below.
Bridge Loans VS Traditional Loans.
Bridge loans have a fast application, approval process. Which we can’t see in the traditional loans. However, in exchange, bridge loans charge high-interest rates, short-term credit, and high conventional fees. Generally, borrowers accept these loans because they need fast and convenient money. They have a mentality of paying short-term loans on time at a low rate of interest and most bridge loans do not charge prepayment penalties for submitting late.
Let us see some other options, rather than bridge loans.
People who would not like to go with bridge loans can apply for loans that are backed by stocks, bonds, or other assets. Some lenders also hybrid mortgage products that work like bridge loans only.
For example, a customer with $50,000 worth of equity on $1,00,000 worth of the home. Then, they could obtain a loan on a combination of a first and second mortgage on a $1,00,000 home. They would incur an additional cost of $184 on a home mortgage.
What if the sale went down?
Real estate prices are very volatile. Lenders can provide the extension in bridge loans for more than six months. Suppose they need money to buy a new house from the bridge loan and what if the old house is not sold or they do not want to sell?
In that case, the lender will foreclose the old property after the six-month extension period of the bridge loan. The customer could deed the property to the bank and banks take the charge of selling it. Meanwhile, the customer has to pay the debt.
To conclude, Bridge loans are a good way of finance for you to buy a new house. Meanwhile, your old house is on sale. There is a factor like changes in the price of real estate which need to be taken care of before taking up bridge loans.
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