Having your own home or property is definitely one of the great achievements in life especially if you have worked hard for it. You can start with a small one that suits your needs then have it renovated or buy a bigger one if you are going to have a family later on. However, buying another home is not always an easy thing especially if you are short on budget. Selling your old home to fund the new one is a good idea but selling a home may take some time and you might lose a good deal on a specific home you want if you wait for your old home to be sold. This is where bridge loan comes in.
What Is A Bridge Loan?
Bridge loans, or also known as bridge financing loans, bridging loans, or swing loans is a type of short-term loan usually used by homeowners and real estate investors to purchase a new property until a long-term financing is set up. Bridge loans are usually just temporary and can range from only a few weeks to 3 years.
Bridge loans are very common in private or hard money lending although some financing institutions like banks may also have bridge loan programs offered for homeowners. These kinds of short-term loans are usually the common solution preferred by homebuyers when they want to close a good deal on a certain property immediately but have no funds available yet. Through a bridge financing loan, homebuyers can obtain the necessary funds as down payment for the new home then repay the loan in full once the old home is sold.
Types of Bridge Loans
Bridge loans may differ from borrower to borrower basically because every borrower has different needs and financial situations. However, in general, there are two types of bridging loans based on the structure of the loan.
One of the most common and typically preferred by homebuyers is the bridge financing wherein you borrow money with your current home as the collateral then pay off the remaining mortgages on the old home and the remaining of the fund as down payment for the new home you want to purchase.
These kinds of bridge loans usually do not require borrowers to make monthly payments to repay the short-term loan. Borrowers are only required to make payments for the mortgage of the new home and once the old home is sold, the borrowers will fully pay the bridging loan including all accrued interests and the remaining balance on the bridge financing loan.
The second type of bridging loan is a bit more complicated and also less preferred by many borrowers because of the cost of the loan. In the second type of bridge loan, borrowers borrow money based on the equity acquired from their old home. The current mortgage from the old home is retained and the fund from the equity of the old home is used as down payment for the new home.
The good thing about this type of bridging loan is that the amount of the loan will be relatively low compared when you get the first type of bridge financing loan. However, the downside of this kind of bridge financing loan is that you will acquire two monthly repayment responsibilities which include your current mortgage and the mortgage on your new home. Most lenders would also not require monthly payments for the bridging loan just like the first type of bridging loan and will only require one full repayment once the old home is sold.
Having two monthly repayments, the mortgage on your old home and mortgage on the new home, will be a big responsibility especially if you are not earning that much to make two monthly mortgages payments. If your financial situation is not suitable for this kind of bridge loan, and have to stretch resources just to repay two mortgages, then you will most likely not qualify for bridge loans.
Some hard money lenders may be more considerate when it comes to lending through bridging loan compared to banks and other standard loan providers. However, since they are not a big fan of acquiring properties (especially residential ones) just because of loan default, borrowers with difficult financing situation may also experience difficulty acquiring a bridging loan from private lenders.
Benefits and Drawbacks of Bridge Loans
Just like in other types of loans, bridging loans or bridge financing also has its positive and negative points. Before deciding which loan to take to buy a new home, it is important to properly understand first the benefits you will take from the loan and its drawbacks.
- One of the major benefits of getting a bridge loan to finance a new home purchase is that you can put your current home in the market immediately without restrictions.
- Bridging loans usually do not require monthly repayment but a one full repayment only once the old home is sold.
- Bridge loans are quite more expensive compared to other types of financing options like home equity loans.
- Some bridging loans would still result to the homebuyers paying two mortgages. With the increasing interest on the bridging loan plus the two mortgages, it can be a very dangerous financial situation for the borrower.
Bridge Loan and Home Equity Loan
Another type of loan which is also a common option for some homebuyers when planning to buy a new home or renovate is home equity loan. Unlike the bridge loans wherein the homebuyers definitely have the intention to sell their old home to repay the loan, home equity loan does not require sale of the old home of the borrower.
Borrowers who prefer home equity loan are those who are planning to renovate their home, make some restoration or improvements to increase the value of their home. Since home equity loan is a more affordable option than bridge loan, most borrowers prefer this kind of loan when they have no intention to sell their current home. If you need funds for restoration or improvement purposes only, then a home equity loan will definitely be a good option to get your financing needs.
How to Get the Best Deals to Finance Your New Home Purchase
With so many bridging loans and lenders available, finding the best deals can be quite confusing and stressful especially if you are really not that well knowledgeable when it comes to real estate transactions. However, when it comes to bridge loans, one of the best tips you should consider to get the best deals is to find the lender that is willing to handle both the bridge loan and the mortgage for your new home.
According to financing experts, most lenders are willing to provide more affordable rates and terms for the short-term bridge loan if they are also the one who will be handling the long-term mortgage on the new home. This would mean long-term business and profits for the lender and a better deal for the borrower – two parties will both benefit from these kinds of transactions.
Looking for the Best Market Conditions
Market conditions are very volatile and situations vary from area to area. This is why it is very important to understand the market condition and structure in your area as well as in the neighboring areas to know the right time to make your move. Selling and buying a home is definitely not a good move if the market condition is not favorable so look for the optimal condition especially when prices are realistic and reasonable.
According to the NAR or the National Association of Realtors, when the housing market is doing well, homes on sale are usually sold within a month or two. However, during not-so-good housing market condition, homes can remain on sale for 6 months or even more especially if the price of the home is a bit higher than the average.
If your home has been on sale for quite some time, say more than 3 months already, consider the price of the home since your home might just be overpriced. If you already applied for a bridge loan, immediately contact your lender and ask for extension of the period of the loan to avoid default and losing your home.
If you want to make sure that you can sell your home before getting a bridging loan, you should first inquire about the housing market condition in your area. Find some local realtors and inquire to find out how long homes sit on the market and the price range of homes on sale. If you put your home on the market and already attracted many bidders, then make sure to immediately answer inquiries so prospective buyers can decide early on if they want to buy your home.
However, if your home has been on sale for weeks or few months already, consider reducing your asking price to increase your chances of finding prospective buyers. Although getting a bridge loan is a good option to get your dream home, it is always a better decision to complete the sale of your old home before purchasing a new one to avoid financial burden.