Planning to buy and move to a new home but waiting to sell your current home? Buying a new home and at the same time, selling your current residence can be a delicate balance and may cause financial strain. Thankfully a bridge loan mortgage can help ease your home buying journey.
Before we talk about Bridge loan mortgage, we first need to understand the meaning of mortgage. A mortgage is a specific type of loan which is used to purchase a real estate property. Mortgages are offered by banks, credit unions, private lenders and other financial institutions. People borrow the mortgage against the value of an asset, usually real estate property is put as collateral. Your lender has the right to take the property if you default and fail to pay it off.
Bridge loan mortgage –
A bridge loan mortgage is a short-term and temporary loan secured by the borrower’s existing property. It bridges the gap between short-term cash requirements and long-term loans. It is specially used when you want to purchase a new home but rely on the money that you will get by selling your existing residence. If you list your current property for sale, you never know how much time it will take to close the deal. Meanwhile, another buyer may come and buy the property that you have your eyes on but you couldn’t make the deal due to the lack of cash. In this kind of situation, a bridge loan mortgage can prove to be the best option.
Though the bridge loan mortgage offers you a quick financial solution, it is riskier too. You may lose your property in case you default it or are not able to pay off the debt. Consider the following pros and cons and other factors before applying for a bridge loan mortgage
Pros of Bridge loan mortgage –
Following are the advantage of Bridge loan mortgage:
- Immediate access to funds – If you have some time-sensitive deal in your hand, a Bridge loan mortgage can be the best option.
- Fast approval and financing – Loan approval and fund transfer are generally faster than conventional banks. Usually, you get the fund within one or two weeks.
- No contingency needed – You can immediately use the equity in your existing house to purchase a new property. You do not need to wait for the current property to sell when you use a bridge loan mortgage for real estate transactions.
- Payment flexibility – Bridge loans offer borrowers the flexibility of paying when they have cash flow, at least for a period of time.
Cons of Bridge loan mortgage –
The following are some disadvantages of borrowing a bridge loan mortgage:
- Higher interest rate – Bridge loan is more expensive than other types of mortgage as you will have to pay a higher rate of interest.
- Conventional down payment – Bridge loan mortgage is not an option for everyone as it typically requires borrowers to have at least 20% home equity.
- Repayment schedule – You will typically have 12 months to repay the debt with interest. As a bridge loan mortgage is secured by your real estate property, you may lose your property If you fail to pay off the debt in the given time.
Cost of Bridge loan mortgage –
Bridge loans are a convenient way to obtain temporary financing if you want to purchase a new home but have not sold your current property yet. However, this type of short term loan with higher interest is more expensive than a traditional mortgage. Bridge loan interest rate depends upon the borrower’s creditworthiness and the size of the loan but generally, it ranges from 8.5% to 10.5%.
The borrower is not only required to pay interest rate but they also have to pay closing costs and additional legal and administrative fees. The closing cost and other fees for a bridge loan typically range from 1.5 % to 3% of the total loan amount which includes the following:
- Application fee
- Appraisal fee
- Credit report fee
- Escrow fee
- Home inspection
- Origination fee
- Underwriting fee
- Title insurance and search
Is the bridge loan mortgage right for you?
A bridge loan may be a good option for those who want to purchase a new home and have listed their current residence for sale. People who rely on the money they get by selling their current home may choose a bridge loan to finance their new home. If you are stuck in this situation and have decided to apply for a bridge loan mortgage, consider the fact that the interest rate is higher for this short term mortgage. If you are sure that you will be able to sell your current home in the expected time, you should go for the bridge loan mortgage. But if there is even a slight doubt that you won’t be able to sell your existing home in the expected time period, then be careful, you may lose your property that you have put as collateral if you fail to pay off the debt.