Bridge loans have been a bit of a dirty word in real estate circles amid what has been an excellent real estate decade. However, if the slow down that has taken hold in other parts of the country should make its way to your town, discussion about the viability of bridge loans will no doubt increase.
As a finance solution, bridge loans are aided chiefly by their speed. Taking on the form of a loan that is anywhere from the span of a few months to a small number of years, the short payback time of the loan affords a quick cash infusion in the real estate situations it becomes necessary.
To be clear, bridge loans include the risk that might not be worth investigating this particular finance option for some situations. Some opportunities that can be seized with a bridge loan include some commercial real estate purchases, some investment opportunities or perhaps to take advantage of a short-term benefit such as a reduced interest payment offer.
In the world of financing a home, the bridge loan is a fast, temporary solution. For investment properties, it is possible that a bridge loan could come into play to finance repairs or work done on a particular property to bridge the gap between the original purchase of the property and a more permanent funding option.
Perhaps more commonly seen is the use of a bridge loan as a finance option for families that plan to purchase a new home with the proceeds of a current home’s sale. Should the closing of the original home take place after a down payment is required for the new home, a bridge loan offers a solution to that funding issue.
That bridge loan can be made in two principal ways. In one, the bridge loan is essentially made based on the equity of the old home and can be repaid as soon as the original home’s closing goes through. A family would continue to pay the mortgage on the original property while the bridge loan covers the down payment on the new property.
Another version of the same type of loan instead pays off the old home mortgage and new home down payment at the same time. Customarily, this type of bridge loan avoids monthly payments, instead offering the convenience of paying off the entirety of the loan at the sale of the original property.
This kind of activity is common in a slower home-selling market, something that has not been seen for some time but which can always reappear. An easy example would be a family that finds a new place to live and wants to make an offer on the property even though their original home has been on the market for some period of time. With the bridge loan as recourse, that family can go ahead with the new home-buying process without fear of ending up in an untenable situation, stuck between a home purchase and a home sale.
Of course, the exact way a particular bridge loan works is entirely dependent on the financial situation of the family and the terms of the lending agency. The speed of the bridge loan often comes with added interest cost, usually one to two percent higher than an applicable long-term mortgage for the property. Sometimes, combining a bridge loan and new mortgage loan with a single lending agency can yield a discount on the bridge loan finance rate.
No matter what the situation, your realtor can provide valuable advice on the funding options available to you to finance the new home you’re looking for. Should a situation that calls for a bridge loan come up, your realtor is the best resource for advice and should be consulted in any modifications of your mortgage during the selling process. Bridge loans can be a valuable tool but the terms and conditions therein weigh heavily on the true benefit seen. Consult your realtor to be sure.