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What Are Bridge Loans?

April 16, 2019
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What Are Bridge Loans?

Have you been looking to buy a new home and wondering if bridge loans are right for you? However, before that, you have to take care of other things, such as:

  • Selling your existing property
  • Financing needs to make a down payment on your new house as you wait for the bank to process your mortgage
  • Needing cash to fix and rent your property

If you don’t have access to ready money because your original property hasn’t sold yet, bridge loans are the ideal solution.

These loans help you secure your bid on the new property as you work out a more permanent financing solution.

In other words, you’re effectively borrowing the down payment on the new home.

“Bridge loans are temporary loans to bridge the gap between purchasing a new house and selling the old one.”

As the name suggests, this is a temporary or transitional loan to bridge the gap between purchasing a new house and selling the old one. It is typically a short-term financing option backed by some collateral and an interest component.

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Interest Rates, Terms, and Fees Associated With a Bridge Loan

Before you take a bridge loan, you should understand the various terms and conditions associated with it.

bridge loans, fix and rent
The interest rate and terms vary depending on the sales price of your new home and your new mortgage.

Since these loans are high-risk, short-term loans, they usually come with a premium of approximately 2% on the market rate. The duration of a bridge loan typically runs between 6 and 12 months.

“Bridge loans are high-risk, short-term loans.”

The LTV (loan-to-value) ratio depends on the new mortgage risk. Lenders will finance up to 80% of the value of your property. Also, you might come across the following fees when taking out a bridge loan:

  • Administration fee: Covers the administrative cost of processing your loan.
  • Origination fee: Cost you have to pay your lender for handling your loan application. It is usually 1 percent of the total loan amount.
  • Appraisal fee: This is the fee paid to a professional appraiser to value your home and determine its market value.
  • Escrow fee: Fee paid to a third party to safeguard the asset and act as the middleman who referees the transaction ensuring both parties fulfill their part of the agreement.
  • Wiring fee: The cost associated with making any wire transfers.
  • Title fee: It is a one-time insurance premium you pay at the time of change of title of property.
  • Notary fee: Charges paid to a notary for verifying the identities of the persons signing the agreement.

Making Payments

When making repayments, you may not require monthly payments for a few months.

bridge loans, fix and rent
The repayment terms on a bridge loan vary depending on the structure of the investment and the nature of the credit.

Say you have taken a bridge loan to finance your residential property, and you sell off your home before the loan term lapses.

In this case, the lender may not need you to make the remaining payments after you sell the house.

Instead, the lender may require you to make a balloon payment to close out the loan.

Investopedia defines balloon payment as: “A balloon payment is a large payment due at the end of a balloon loan, such as a mortgage, a commercial loan or another type of amortized loan. A balloon loan is typically for a relatively short term, and only a portion of the loan’s principal balance is amortized over that period. The remaining balance is due as a final payment at the end of the term.”

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Pros and Cons of a Bridge Loan

When dealing in the property market, you never know when you might come across the property that is perfect for you. Once you find your dream home, you have to make a move or risk losing it to another buyer with ready cash. That’s where a bridge loan comes in handy.

“Bridge loans help to maintain a healthy cash flow”

Homeowners are never sure when their house will sell. Plus, the real estate market does not allow you to make an offer on a property contingent on your previous home selling.

bridge loans, fix and rent
For commercial investors, these loans are often a means to maintain good cash flow.

However, for both residential and commercial borrowers, the risk associated with bridge loans is also high.

It, therefore, makes sense to weigh the pros and cons of a bridge loan to decide whether it is the right option for you.

Pros:

  • Allows you to make a quick bid to purchase a property.
  • You don’t have to wait for your traditional mortgage to come through.
  • Enables you to buy a new home even before you sell the existing house.
  • Facilitates a better cash flow position in case of commercial buyers as you arrange long term financing.
  • Does not need you to make monthly payments for a few months.
  • It gives you time to find the best deal on your existing house.

Cons:

  • Comes with a higher interest rate and fees.
  • You have to qualify to own two homes.
  • Certain lenders penalize you for prepayment of the loan.
  • There is uncertainty whether you will be able to sell your old house before the term of the bridge loan is up.
  • Risk for high financial burden from taking two mortgages and the interest on the bridge loan.
  • While financial experts recommend selling off your old home before you buy a new one, it is good to have the option of taking out a bridge loan. Carefully consider your situation and options and choose the best alternative.
Apply for Bridge Loans With Gauntlet Funding Today

If you still have questions about bridge loans, speak to the hard money lending experts at Gauntlet Funding. We offer competitive rates with any prepayment warranties for prime borrowers. Contact Gauntlet Funding today at (631) 465-2161.

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