What Are Bridge Loans and How Do They Work?

What Are Bridge Loans

Are you interested in purchasing a house and want to close on it quickly—even though you haven’t sold your current home yet? This situation is increasingly common in today’s housing market since many people want to take advantage of the good deals that are out there.

This is especially true in a situation where you may be unable to afford your present home much longer and want to get an excellent deal on another home while the deal is still available.

One way to do this is to get a bridge loan. A bridge loan is a short term high interest loan which you can use to furnish a down payment on a new home while still living in your current residence.

This can work out nicely since you can use your present home as collateral to secure the bridge loan. In the UK they are known as bridging loans, and in some markets they may be called caveat or swing loans. Sometimes they are confused with hard money loans.

It is possible for a hard money loan to be a bridge loan, but only if the time period of the hard money loan is short term and temporary—that is what classifies it as a bridge loan.

Obtaining a bridge loan is a more casual process than obtaining a standard mortgage; there aren’t many official guidelines and funding is usually provided based on whether the situation seems sensible to all parties involved. Once the original property is sold, the borrower will be able to pay back the bridge loan.

Bridge loans are rather expensive to procure unfortunately and include a number of fees. Some of these fees include an administration fee, an appraisal fee, an escrow fee, a title policy fee, a notary fee, and a courier fee.

Together these fees can add up to a couple of thousand dollars on top of the interest you’ll have to pay. There will also be a loan origination fee which will vary based on how much money you want to borrow. Along with all of all these fees, you’ll have a high interest rate, typically between 11-15%.

Terms

Terms on loans are usually about 12 months, and for your first few months you won’t have to make any payments. During that time, interest will still accrue, so don’t forget that you’re still losing money during that time period.

A bridge loan can be a great way to get in on a good deal before it’s too late, and many people are using them now to get homes at rock bottom prices.

Nonetheless in order to qualify for a bridge loan your circumstances will have to be such that you will be able to pay it back—and you won’t want to get one unless you can do that anyway.

This means you’ll need to be able to use the profits from an impending sale on your current property in order to pay off the bridge loan. If this describes your situation they’re definitely worth looking into!