If you just read the title above, you are probably curious, what what is a bridge loan.
You may have thought that its some loan from a lender to construct a bridge. If that was your answer, you answered wrong. Don’t worry, that’s what I thought when I first saw this term.
So, what exactly is a bridge loan? The whole idea of a bridge loan is to purchase a 2nd home without the stress of having to deal with having two mortgage payments.
For my number crunchers out there, in this next section, I’m going over some numbers so you can have a good understanding of how this type of loan works.
Let’s Talk Numbers
Let say hypothetically your employer informed you that you would have to relocate, to accept a job promotion. Now you find yourself having to move and finding a new home.
You found that the perfect new home that’s located near your job. Let see how the numbers play out If you were to obtain a bridge loan.
Keep in mind that lenders typically will lend up to 80 percent of the combined value of the two properties.
let’s say that your first home is worth $100,000. To make things easier, you decide to get a bridge loan for the purchase of the new house. To simplify things, let’s say that the new home is also worth $100,000
In this case, the combined cost is $200,000. The lender is willing to lend up to 80 percent of $200,000, which is $160,000 minus the $60,000 mortgage balance that you still owe on your first home. So, the amount that the lender will lend you is $100,000.
Requirements For A Bridge Loan
The criteria for obtaining a bridge loan is that some lenders require you to list the home on the market, and the first property must have equity.
Pros of A Bridge Loan
- By obtaining a bridge loan, you want to be able to free up cash; allowing you to save money. With a bridge loan, you only have to focus on making one monthly payment. As opposed to making mortgage payments on two properties.
- A bridge loan allows you to take advantage of time, allowing you to purchase your second home and listing your first property. Having an extensive time frame can allow you time to accept the best offer from a Buyer that is willing to purchase your first home.
- Without a bridge loan, you may have to submit a purchase contract on a home contingent that you first sell your home.
From the seller’s point of view, this can be seen as a non-solid offer and is less likely to be accepted by the seller, especially in a competitive real estate market. A seller does not want to deal with the uncertainty of you the buyer being able to get the net proceeds from the sale of your first home.
Is A Bridge Loan Right For Me?
Although A bridge loan has a lot of advantages, you have to weigh your options. You have to factor the following when considering a bridge loan.
Interest rates on bridge loans are higher as to oppose to traditional mortgage products out there.
Keep in mind that once you sell your 1st home, you have to refinance your new house into a convention mortgage, in which you will likely incur refinancing fees.
Bridge loan for investors
In this article, I talked about using bridge loans to purchase a primary residence. A bridge loan can be used by investors as well. This type of loan can be used to secure a new property; using an existing property, and then repaid with the aid of the proceeds from the subsequent sale of the present-day property.
So, there you have it, you can officially consider yourself as a bridge loan expert.