What's a bridge loan?
A bridge loan is a short-term loan that is used to bridge a financial gap, typically between the purchase of a new home and the sale of an existing one.
Here's how it works and why someone might consider getting one:
How a Bridge Loan Works:
1. Timing Gap: When you're selling your current home and buying a new one, there's often a timing gap between these transactions. You might find your dream home before selling your existing one, or the sale of your current home might take longer than expected.
2. Immediate Funds: A bridge loan provides you with immediate funds to cover the down payment and other costs associated with buying a new home before your current home is sold. It helps bridge the financial gap during this transition period.
3. Short-Term Nature: Bridge loans are short-term loans with terms typically ranging from a few months to a year. They are designed to be repaid quickly, usually when the borrower sells their existing home.
4. Higher Interest Rates: Bridge loans often have higher interest rates compared to traditional mortgages because they are considered riskier due to the short-term and contingent nature of the loan.
Reasons to Consider a Bridge Loan:
1. Competitive Real Estate Market: In a competitive real estate market, you might need to move quickly to secure a new home. A bridge loan allows you to make an offer without waiting for the sale of your current home.
2. Avoiding Contingencies: Sellers may be more inclined to accept your offer if it doesn't include a contingency clause related to the sale of your existing home. A bridge loan allows you to make a non-contingent offer.
3. Timing Flexibility: If you want to move into your new home before your current one sells, a bridge loan provides the necessary funds to make this possible.
4. Home Renovations: If you plan to buy a new home that requires renovations before moving in, a bridge loan can provide the funds needed for these improvements.
1. Financial Risk: There's a risk involved in relying on the sale of your current home to repay the bridge loan. If the sale doesn't happen as quickly as anticipated or at the desired price, you could face higher interest payments.
2. Costs: Bridge loans often come with higher fees and interest rates, so it's important to carefully consider the overall cost of the loan.
Before deciding on a bridge loan, it's crucial to assess your financial situation, evaluate the housing market conditions, and understand the terms and costs associated with the loan.
If you are in need of a bridge loan, we have several banks we work with to provide you access to your equity without having to wait until your home sells.
One major downside to most bridge loans is that you need to qualify for both payments. Fortunately, you may also have access to a “cash offer” program that you can read about here that allows us to exclude your current mortgage and the bridge loan payment to increase the amount you qualify for!
If you have any questions please book a time to chat here.