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Bridge Loans

Bridge loans let you buy a new home or property before finalizing a sale on your current property. Since the housing market is so tight, anyone could sincerely benefit from them- but only if you can afford it. Bridge loans ask for 20% equity from your current home, has high fees, interest rates and has the most potential in places where houses sell fast. Let’s talk more about them.

 

In anyone’s ideal world, the old property would already be contractually bought before placing an offer to buy a new one. The money from the sale would be acting like the down payment, and after moving, you’re already in your new home. Sadly, most of us don’t live in an ideal world, and, well, that’s why some people choose to go with bridge loans.

 

Bridge loans offer many benefits, one of which is more time between transactions due to your access to home equity before a sale. Because of this, the loan helps to avoid taking contingent offer routes on the property you’re looking to buy. These contingent offers can allow you to get out of a contract if the current house doesn’t sell, so it’s pretty obvious to understand why home sellers don’t appreciate them. In a seller’s market, people with conditions are very unlikely to be able to compete against people who already have money.

 

Okay, so… how do they work?

When you apply for a bridge loan, expect similar credit and debt to income requirements as a mortgage. Most lenders will never go above an 80% loan to value ratio, so you’ll need to have at the very least 20% and above equity in your property if you want a bridge loan.

 

The loans are only ever used in two ways:

  • As an easier way to pay off your mortgage so you don’t have to deal with an abundance of money for the down payment.
  • The other is for another mortgage which actually ends up being the down payment for a new property.

 

First Example: Easier to pay off the mortgage and down payment

Hypothetical scenario- let’s say that your current property is worth $300K and owe $200K on a mortgage. A bridge loan for 80% (the normal amount), which is $240K, leaves you with $40K. If the bridge loan fees and closing costs for it are $5K total, then you will have $35K to spare for your new property down payment.

 

Second Example: Another Mortgage

Another hypothetical scenario- let’s say your current property is again $300K. If you had $200K on the mortgage, you will have $100K in equity again and a bridge loan for 80% of your home equity would give you $80K  for your appliance for buying your new property.

 

Of course, both of these cases assume that your old house does indeed sell, which will allow you to actually pay the bridge loan and interest very quickly. However, if it doesn’t sell in time, then you’ll owe the entire loan amount along with your second mortgage. This could possibly be a little bit problematic and could cause financial stress along with forcing you to default.

 

The Pros and Cons of Bridge Loans:

 

The Pros of a Commercial Bridge Loan

 

  • Payments are typically only ever interest. Either that or it is deferred until the new home is sold.
  • It is definitely possible to make an offer for a property without a sale contingency.\

 

The Cons of a Commercial Bridge Loan

  • You may pay a high interest rate. Lenders sometimes even use variable prime rates that go high with time.
  • There’s a chance you may own two properties at once and have to pay two mortgages.
  • You may have to pay for an appraisal, some fees, and closing costs.
  • There is a constant 80% loan to value ratio, and this means that it needs more than 20% equity in order to get money for the property you are hoping to get.

 

Situations where a bridge loan could help tremendously:

 

  • Sellers will not allow contingent offers (in your area).
  • There is certainty your house will sell, but you would prefer to secure a new one before selling the old one.
  • You simply can’t afford down payment without your current property funds.
  • Closing on your old house is happening after the closing date on your new one.

 

How to Find Bridge Loan Mortgage Lenders

 

As per usual, the best place to begin is locally. Instead of a credit union or a bank, search the internet to look for bridge loan lenders with good reputation. Make sure to avoid collateral based lenders who advertise easy, fast cash on the internet. While they may offer bridge loans, they will force you to pay higher interest rates when compared to normal-speed lenders.

 

Bridge Loan Alternatives

 

If you simply cannot find a bridge loan lender or feel that it’s far too risky for you, don’t give up. There are definitely alternatives that are more affordable and possibly easier to acquire. However, something to keep in mind is that they will all have you maintain multiple mortgages until your old property sells.

 

HELOC Loans (Home Equity Line of Credit): This is a second mortgage which allows you access to your home equity similarly to a bridge loan. However, there will be a considerably better interest rate, you will have more time to pay it off and pay closing costs (which will also be lower). HELOCs usually allow you to utilize funds in other ways, like home improvements to increase your home value.

 

Make sure to keep in mind that you can’t get a HELOC on properties that are for sale. Because of this, it calls for action in advance. As a general rule of thumb, avoid HELOCs that have you prepay for anything as they could potentially cut into your profits if your house does indeed sell in a timely manner.

 

Before Making a decision, be sure to let one of our experts at the Colorado Mortgage Pros to help you find out what loan is best for you.