What Are Bridge Loans and How Exactly Do They Work?

At first glance, you might think a bridge loan is just what homebuyers need. They need to bridge the gap between the sale of their previous home and their new home. Before making a decision, you have to get to know more about bridge loans.

What is a Bridge Loan?

A bridge loan is a certain type of short-term loan which can be valuable during the transition period. For instance, if you are transferring from one home to another. Homeowners are suddenly confronted with sudden transitions. For instance, if you have to relocate due to your job, you might need a bridge loan to help you cope with the cost of purchasing a new home.

Just like mortgages, the collateral of a bridge loan is your present home. However, a bridge loan cannot be considered as a substitute for a mortgage. It is a short-term loan that you can repay within a period of six months to three years.

How Does a Bridge Loan Work?

The cost, term, and conditions of a bridge loan likely vary. Some are designed so they can entirely pay off their previous home mortgage. The interest of a bridge loan also varies. Sometimes the interest is included in the monthly payments, while others have to be paid upfront or lump-sum.

Most of these loans share common characteristics. For instance, the borrower’s old home will be used as collateral, and the term of the loan will be up to six months. If you are in need of a bridge loan, you have to determine how much you can afford and how fast your home can sell in your market.

What are the Benefits of a Bridge Loan?

If you are using a bridge loan for real estate purposes, you can instantly use your existing home’s equity to purchase a new one without having to wait when your previous home is sold.

Also, a bridge loan might not require you to make monthly payments for a couple of months. It also gives you the option to pay whenever you already have the cash flow.

Where to Find a Bridge Loan?

Lenders mostly offer bridge loans. However, you can also secure it from your present mortgage provider. If you think that you need a bridge loan for your present situation, you should speak to your lender.

What are the Alternatives to a Bridge Loan?

One of the most common alternatives to a bridge loan is a home equity loan. Like a bridge loan, this type of loan is secured by collateral which is your present home. However, this is the only similarity that they have. With home equity loans, you will borrow against the accessible equity in your home. These are typically long-term loans and can be repaid within 5 to 20 years.

Also, using a home equity loan to finance the purchase of your new home can be risky. In case you are having difficulty selling your old home, you will likely be paying three loans – the new mortgage, the old mortgage, and the home equity loan.

Conclusion

Obtaining a bridge loan is appropriate if you purchase a new home before selling the old one. A bridge loan is also the best deal you can get if you are in a tight situation. For instance, if you are relocating for your job without any advance notice or need help paying the expensive upfront cost of purchasing a new home. Hence, if you choose to get a bridge loan, you should consider these important factors to have multiple loans if your home is not sold right away.