Is a bridge loan right for me?
You’ve found the perfect home for your growing family, but there’s just one problem. You have to sell your current house first. Well, maybe not.
Bridge loans are a popular solution for homeowners who want to buy a new house before selling their current property. A borrower can use a portion of their bridge loan to pay off their current mortgage while using the rest as a down payment on a new home.
A bridge loan may be a good fit if you:
- Have chosen a new home and are in a seller’s market in which houses sell quickly
- Want to purchase a property but the seller won’t accept an offer contingent on the sale of your current home
- Can’t afford a down payment on the new property without first selling your current home
- Want to close on a new home before selling your current home
- Aren’t scheduled to close on the sale of your current home before closing on the new house
A bridge loan is a form of short-term financing that offers an interest-only payment with just a 12-month
term. It requires a borrower to pledge their current home or other assets as collateral to secure the debt – plus, the borrower must have at least 20% equity in that home. Bridge loans typically have interest rates that are higher than traditional, long-term financing options. In addition to paying interest on the bridge loan, borrowers must pay closing costs and additional legal and administrative fees that typically range from 1.5% to 3% of the total loan amount.
However, the application and underwriting process for bridge loans is generally faster than for traditional loans. Plus, if you can qualify for a mortgage to purchase a new home, you can probably qualify for a bridge loan – assuming you have the required equity in your first home. This makes bridge loans a popular option for homeowners who want quick access to funds to purchase a new house before they have sold their current property.
Bridge loans can be a great tool when you need funds but don’t yet have access to a long-term financing solution.
Alicia Beecher is consumer lending manager at F&M Trust.
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