What are bridge loans?
- As the name suggests, bridge loans are temporary loans that help in ‘bridging’ the gap in your finances.
- You may borrow money against your existing property and the new one. This type of financing is secured by a real estate asset and tends to have a floating rate and a relatively higher interest rate than permanent loans.
- The Size of the Loan
- Typically, the loan size is determined by adding the value of the new property to your current mortgage and then subtracting the value of your existing house.
- You’ll be left with the ‘end debt’ i.e. the principal of the entire loan. Please note that the end debt will determine your ability to repay the loan.
- The lender will use both properties as security. This means that you’ll have to cover both the existing debt as well as the cost of the new property until you sell your current house with one home loan called the peak debt.
- Once your property is sold, you can simply continue repaying the home loan with the added interest of the bridge loan on the new loan. Please note that the interest is compounded monthly. So, the longer it takes to sell the property, the higher the interest amount you’ll have to pay.
- Important Things to Consider
- You should keep the following things in mind when applying for a bridge loan.
- Make sure you have a realistic timeline for selling your existing property
- Have your property assessed professionally so that the selling price you set is realistic
What Are the Advantages of Bridge Loans?
Here are the top five advantages of bridge loans.
- Bridge loans are quick. You don’t have to miss out on an opportunity just because the traditional lender (your bank) is slow on closing the deal.
- You don’t have to wait until you sell your current property to buy your new home. A bridge loan will fill the financial gap.
- These loans allow you to buy out an investment partner who is no longer interested in the real estate partnership, setting you up for long-term benefits.
- There are no strict specifications for getting bridge loans as compared to conventional loans. It mainly depends on the judgment of the lender and your ability to repay the loan.
- You may get to enjoy the option of flexible payback. While you’ll likely have to give proof of a secure income source, you might be allowed to utilize an interest reserve given there is sufficient equity in the property for a larger loan.
- Bridge loans are indeed an easy and convenient option for buying a new home quickly while eliminating stress and frustration from the equation. To learn more about the right financing option for you, schedule a consultation appointment with an expert at Blake Mortgage!
