What are bridge loans?
Bridge loans are a sort of secured loan given on short term basis. They are an effective tool used by individuals who want to sell an existing property in order to purchase a new one. The loan allows one to make an offer on a new property without necessarily giving a contingent on the sale of an existing home In simple words, you can obtain financing through the bridge loans until you qualify for a long-term loan. One has a good chance of getting a good deal when there are fewer contingencies involved. Since bridge loans is a kind of secured loans, then pledging security is mandatory. The purchased home or property can be used as a security in this case.
How it works
Before one qualifies for a bridge loan, the lender considers the value of the property and not the buying price. A borrower can, therefore, avail 75% of the worth of property. The loan is available to a maximum of 6 months though it can be extended up to 2 years depending on the lender. One is required to pay for interest only during the lending period. The rest can be repaid after a successful sale of property or home.
One can also be given unearned interest rate in case they manage to sell the property during the specified period. If not, then the loan will be converted into a general loan in case it matures in advance to sell your property. You will be charged zero fees for that.
Types of bridge loans
Bridge loans are divided into two main categories. The first type of loan enables individuals with limited funds to borrow adequate money to cater to the existing mortgage. The loan is also enough for a security deposit of your new property. This means you will only be required to pay for your mortgages every month. You will then pay all the unpaid mortgage payments as well as the accrued interest the moment your property is sold.
The second type of bridge loan caters for income people. The loans cater to your security deposit on the new property. You will also continue to pay mortgages for both your new and old homes. The principal amount for a security deposit as well as the accrued interest is then repaid once you sell your old property.
Benefits of Bridge Loans
You can acquire your dream home at any time with this type of loan. For instance, you are thinking of purchasing a home but lacks enough cash. The home may be in high demand thus a high risk of somebody else purchasing it. All you need to do is obtain a bridge loan and pay for the new home. Once you obtain your long-term financing, pay off the loan.
It enables one get cash before an actual property sale. The loan is the best option when you want to sell a property urgently for cash. You can then later pay the loan once you successfully sell the property.
There are no monthly repayments. Depending on how you agree with your lender, you will not be required to make monthly installments when repaying the loan. You will only pay once the moment you sell your property.
The loan is associated with higher interest rates because they are given with the expectation of future cash inflow.