How Do Bridge Loans Work?
They work in two different ways – both can be beneficial to you. They can be used as a first mortgage to pay off a current loan and fund a down payment on your new property, or as a second mortgage with down payment money applied. For your first mortgage Bridge Loan, a large loan is taken out, up to 80% of your equity’s value. The funds, initially, are used to pay off your current mortgage balance. The money that’s left over is used to pay a down payment on your new property.
The second mortgage bridge loan option involved borrowing the difference of your loan’s current balance as well as up to 80% of your property value. Your current mortgage loan is left alone, and bridge funds from your second mortgage are used as the down payment for your new property.
An Example Of How Bridge Loans Work
A traditional bridge loan is helpful if you are an investor or a homeowner who owns a property already and is looking to buy a new property. The property owner does not have enough money for a down payment or an all-cash offer to buy the new property, but they do have enough equity in their existing property to finance a bridge loan. Borrowing against their equity will enable the owner to purchase the new property. When the property is purchased, the owner can move into it then sell the old property, which will pay off the bridge loan. Just how it sounds, bridge loans “bridge the gap” between purchasing a new property and selling the old one.
Let’s say your current home is worth $350,000, and you have an outstanding $200,000 loan balance (assuming you receive 80% of your current home’s value). For the first mortgage bridge loan option, you’d have a maximum loan amount of $280,000 – $80,000 for a down payment on your new home and $200,000 to pay off your current loan. For the second mortgage option, you’d have a maximum loan amount of $80,000 that would all go towards the down payment of your new home. For more information, contact a bridge loan lender for accurate information to your own personal situation.
Different Types Of Bridge Loans
The types of Bridge Loans we are going to talk about our residential bridge loans, commercial bridge loans, and bridge loans for seniors. Read on to learn more about these loan types and if they will be beneficial to your situation.
Residential Bridge Loans
This is the most popular route for real estate investors as well as homeowners to purchase a new home before selling their other home. It enables people to borrow against the current residential property in order to buy a new property. When you don’t have the necessary liquid funds for a down payment on a new home, bridge loans reduce that hassle and stress by enabling you to pull equity from the current home to use as a down payment for the new home. When the old property is sold, the residential bridge loan will be paid off.
Retiree And Senior Bridge Loans
Bridge loans might be the only option for seniors and retirees who don’t have enough income to qualify for a traditional home loan. With bridge loans, seniors have the ability to borrow against their current home equity to purchase a new home, minus providing proof of income and being approved on their debt to income ratio. When the old house sells, that serves as the payment of the bridge loan.
Commercial Bridge Loans
Commercial mortgage bridge loans are available to commercial property owners who want to borrow against existing real estate in order to afford a down payment or purchase a new commercial property. These short-term loans for commercial real estate help the real estate owner when they do not have enough liquidity but a lot of equity to borrow against. When the old commercial property is sold, the bridge loan is paid off. Commercial loans are slightly more complex than residential bridge loans as bridge loan lenders will require extra documentation and info in order to process that loan. Due to this, commercial bridge loans usually have a lower loan to value ratio (LTV).
Pros and Cons Of Bridge Loans
- You can tap into equity when your property is still for sale. This will enable you to buy a new home while your old one is still for sale.
- They allow you to move when your existing property is in the selling process rather than having to be stuck finding a temporary place to live while waiting for the sale to go through.
- You can use bridge loans as a second mortgage to buy your new property by borrowing equity that you have on your current home.
- You don’t have to wait to sell your existing property in order to buy a new one. Your offer will be more competitive in tight housing markets as well.
- You can make interest-only payments until your house is sold. Many bridge loan lenders offer programs that are interest-only, which means only the interest charges are what you pay each month. Though the interest rate may be a little higher, it will soften the financial impact of having two monthly mortgage payments.
- You might be able to pay your entire mortgage with a bridge loan and get extra cash! Your extra cash can be used as a larger down payment on your new property.
- You need substantial equity in order to qualify. If you don’t have a solid chunk of equity in your real estate, bridge loans are simply not a viable option.
- You’ll be making 2-3 mortgage payments. When you borrow against your equity then proceed to buy a new home, you’ll potentially be carrying around 2-3 mortgage payments, which can easily become overbearing.
- Interest rates and closing costs are higher. When it comes to short-term lending options, bridge loans will have higher closing costs and interest rates because you are borrowing for a short amount of time – bridge loan lenders have to make their money too.
- They aren’t as regulated as traditional mortgages meaning you’ll have less protection. Regulatory reform rules don’t apply to temporary bridge loans, which have terms of only 12 months or less.