A bridge loan can be a very tempting financial instrument to use, especially when you’re in the market to buy a new home. However, getting one may do you more harm than good in the long run. Let’s take a closer look and see why this is so.
What are bridge loans?
Also called swing loans or interim financing, bridge loans are essentially borrowed money to fund an immediate obligation. These loans are short term and have higher-than-normal interest rates. In real estate, they are generally used to pay for a down payment while their current home is still being sold. The amount to be loaned will be based on the equity of the borrower’s current home.
Pros and cons
Finding out the advantages and disadvantages of getting a bridge loan may help you in weighing your options carefully.
Advantages
- Borrowers can pay for a new home while still selling their current one.
- Buyers get the chance to quickly close in on properties.
- Payment terms generally last from 6 to 12 months but payment only starts after the first few months.
Disadvantages
- Payments are higher and have less flexible terms because of the short paying period.
- It may be difficult to pay for two mortgages and a loan at the same time.
- There is no guarantee that you will be able to sell your home in the duration of the loan term.
Getting a bridge loan
Requirements for a bridge loan varies depending on the bank or lender. But what these lenders usually look at are your credit score and debt-to-income ratio. What makes bridge loans are so tempting is that they generally bypass FICO scores and debt-to-income ratios. If the investment makes sense and the homeowner can prove that they can put the home up with no issues, then it is possible that the credit will go through. This is because lenders expect the homeowner to sell quickly and make some profits out of it.
In getting a bridge loan, it is highly recommended that you get it from the same place where you are getting a mortgage loan. This way, you could be given better rates and terms. But even before you get one, shop around first and talk to different banks or lenders to find the one who can give you the most preferable terms.
Rates and fees
There are several types of rates and fees that you will have to deal with when you take out a bridge loan. There is an administration fee of nearly 10% in all cases, an appraisal fee for half of that, fluctuating interest rates, and much more. A bridge loan can snowball on you quickly, so be absolutely certain that you will have the finances to cover it before signing up for one. Otherwise, you may find yourself in severe financial stress.
Is it right for you?
Whether a bridge loan is right for your situation is dependent on many factors, such as your income, sales prospects, and more. You want to be sure that each move you make is carefully thought out or you can find yourself in a hole in a hurry. Plan ahead, break it all down and make the smart move.
Are you looking for additional advice? Our expert real estate team at By The Bay Realty & Auction will be more than happy to give you sound advice regarding your real estate transaction. Contact us today at 715.682.7337 or drop us a note at [email protected] to inquire.