Are you considering selling your current home and buying a new one? Most homeowners rely on the money they get from their first home to help finance their new home. Unfortunately, things don’t always go as planned when buying and selling houses, and you could end up in a bind, waiting for your current house to sell. When you aren’t able to access the money from your first home in a timely manner, it’s helpful to know what financial options are available to you.
Bridge loans are often the answer for homeowners dealing with this problem. These loans allow homebuyers to take out a loan against their current home that they can then use to make the necessary down payment on their new home. Bridge loans are the perfect option for when you want to buy a new home before selling your current one. However, they should be used with some caution. While they’re generally easy to get, there are both advantages and disadvantages to bridge loans that should be considered.
Read on for more information about bridge loans and how to get them.
What Is a Bridge Loan?
Are you buying a new home? Typically, the money you make from selling your current home is then invested into the process of buying your next, in the form of closing costs or a down payment, but that isn’t always possible. Sometimes your current house doesn’t sell in time. So when you can’t rely on that money, a bridge loan may be the next best option.
A bridge loan is a short-term loan offered by financial institutions to bridge the financial gap between buying a new home and selling your current home. Bridge loans are helpful when you are forced to move unexpectedly or when selling your current home doesn’t happen as quickly as you’d hoped it would.
How Do They Work?
When you find yourself in between buying one home and selling another, you may need financial help. Not selling your first home before buying another can leave you unable to pay for closing costs or a down payment, which is why people often choose to apply for a bridge loan during this time. The application process is similar to applying for a standard home loan. The lender will need your credit history, proof of income, and so forth. You can apply for a bridge loan near you and find that they’re relatively easy to get if you’re well qualified.
A bridge loan is essentially taking out a lien against the first property and using the money to help finance the purchase of a new property. This is a short-term loan and is usually paid off within a year, after your current home sells. Once that sale is complete, the proceeds are simply used to pay off the bridge loan.
Because bridge loans aren’t set up to replace traditional mortgages, many homeowners choose to get a bridge loan through the same financial institution with whom they wish to get a home loan. This can make the process a lot smoother and can come with incentives, depending on the lender. Credit unions are great places to find bridge loans near you, for instance, and many, such as Solarity Credit Union, offer both bridge loans and home loans.
Pros of Acquiring a Bridge Loan
There are a number of benefits that come with using a bridge loan when you need to, which is why financial institutions often make them pretty easy to secure. They understand that buying and selling a home can be complicated and are often able to help make the process a little less stressful.
Peace of Mind
One of the biggest benefits of using a bridge loan is having peace of mind during this time of transition. If you’re buying a new home but there’s an issue with selling your current home, you might not be able to afford to pay for closing costs, a down payment, and potentially two mortgages. This can make it nearly impossible to move forward with buying a new home. But what if you need to move immediately? A bridge loan can make purchasing that new home possible and give you some financial security while you wait for your first home to sell.
Flexibility
Not everyone can wait to move until they sell their current home. Maybe work or family calls for relocation. You always have the option to rent temporary housing and put your things in storage until you sell and can purchase anew, but it isn’t the most convenient option. Or maybe you want to be able to purchase now because the house you’ve always dreamed of owning has come up for sale. A bridge loan can offer you the flexibility to move forward with a home purchase when you need it.
Delayed Monthly Payments
Bridge loans are typically used at a time when finances are somewhat uncertain for homebuyers. That’s why many financial institutions allow borrowers to make interest-only monthly payments for the first 12 months. This can give borrowers some wiggle room financially while they make the transition between homes.
Cons of a Bridge Loan
Having financial options when you’re in between houses can be a real asset, but it can also come with some downsides. For instance, because of the nature of this type of loan, borrowers often have to pay more in the long run to use it.
Closing Costs
Closing costs are often overlooked by buyers when choosing to move forward with any home loan, but they are one of the biggest up-front costs of buying a home. A bridge loan requires all of the typical fees associated with a home loan’s closing costs, often coming to around 1.5 to 3 percent of the total loan amount. Expect to pay for escrow, the appraisal fee, loan origination, administration fees, the title policy, and so on. And you’ll likely have to pay them all again when your home sells and you close on your new mortgage.
Higher Interest Rate
Because of the high risk associated with bridge loans for lenders, bridge loans often come with higher interest rates. These interest rates tend to be at least 2 percent higher than typical mortgage rates at the time of buying. Another reason why lenders require high interest rates on bridge loans is because of the relatively small repayment period. Keep in mind, however, most people are able to pay their bridge loan back completely in a matter of months, so they don’t have to suffer the high interest rates for too long.
If you have questions about bridge loans near you and whether it’s the right option for your situation, reach out to a lender to discuss the details. The best home loan experts, such as the team at Solarity Credit Union, work with homebuyers to achieve their homeownership goals wherever they’re at in life.
