What You Need To Know About Bridging Loans
It’s not always possible to get everything you want at the exact time that you need it. Sometimes, things can work out spontaneously, while other times, things can be out of control completely. For example, what happens if you find your dream home but you don’t have money to finance it yet you haven’t been able to sell you current home? Bridge loans are meant to help you in situations such as this.
A bridge loan, like the name suggests, is a type of financing that takes a short period of time, pending the arrangement of a larger, long-term financing arrangement. Many home buyers use bridge loans to finance their purchases especially when they are considering selling an existing home.
They use the bridge loan to put a down payment for the new house before they can sell their current house to pay for the rest of the purchase price for the new house. This type of loan is gaining popularity because of its convenience, flexibility and the benefits that borrowers enjoy from it.
Understanding Bridge loan
• Bridge loans are also known as swing loans and sometimes referred to as gap financing. It is essentially used to bridge the gap between the sale of an old home and the purchase of a new one.
• Purchases of homes and acquisitions of real estate projects would be impossible without bridge loans.
• Different financiers apply varied terms and conditions. However, most bridge loans run for 6 months and are secured by the borrower’s old home.
• Many financiers do not like the idea of extending the term of a bridge loan unless the mortgage of the new house will be financed by the same financier. This is just a way that lenders use to maintain clients.
• Some lenders require monthly payments of the bridge loans while others require an up-front lump-sum payment with interest at the end of the term.
• Bridge loans often carry a higher interest rate as compared to other loans. This is because of the risks that a lender is taking to put a down payment of a property that a buyer may or you may not be able to complete payment for a new housing development that eventually may not be built. This means that before diving into securing a bridging loan, you must make inquiring from several banks and find a cheap bridging loan.
These types of loans are always considered as a last resort because of the heavy interest rates it carries and the often stringent terms and conditions surrounding it. If you are certain about if and when your home sale will go through then you can apply for a bridging loan to facilitate your down payment.
So, how do you qualify for a bridging loan?
Essentially, you must have an existing initial mortgage on your current home, the one you want to sell. Also, the chances of you closing on a new purchase before selling your existing home ought to be high and if for a short while, the buyer will own the two homes i.e. during the bridging period
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