Bridge Loans: What are they and how do you use them?
Anyone who has bought and sold a home in the past knows it can sometimes be tricky to get the closing dates on both deals to line up perfectly.
This is often crucial for a buyer since they normally rely on all or part of the proceeds from the sale of their current home to make the down payment on their next purchase.
But when that’s just not possible a bridge loan–or bridge financing–can be a useful solution.
Below I’ll explain in detail how bridge financing works and some things to keep in mind should you consider it.
What you should know about bridge loans?
“Bridge” loans get their name since their purpose is typically to bridge the gap between when a homeowner sells their current property and closes on their new home.
This loan allows them to make their down payment on the next property while they wait for their pending sale to close. For this reason, bridge financing is intended to be a temporary solution, generally ranging from a few days to a few months.
But there’s a cost for that convenience. Because of their short term, bridge financing is priced higher than typical mortgage rates. Some lenders may also charge an administration fee and, depending on your situation, legal fees may also be involved.
While most lenders, including all of the Big Six banks, offer bridge loans, not all lenders do. If you think you may require bridge financing, it’s important to contact me ahead of time to ensure the option is available.
The pros and cons of bridge financing
There are several reasons why bridge financing could be an ideal solution. For one, bridge loans are generally easier to qualify for compared to standard mortgages. This is because the lender knows you will have the money to repay the loan once your sale is finalized.
It can also open up additional purchase options, as you won’t be as limited by tight closing deadlines. Not having to worry about lining up closing dates can be a huge stress relief and bring peace of mind knowing your down payment for your next property is already in hand.
And, because the loan will likely be in place for just a couple of months or so, it ends up being a reasonably cost-effective option, even with the higher interest rate.
This isn’t to say there are no risks. A bridge loan is still a substantial financial obligation for the borrower, which hinges on the sale of their property being finalized.
If you want to know more about bridge financing, we can help you explore the available options. Call us today!