YAERD.org Real Estate Loans Guide

Part 1 of 2:

Bridge Loans

Bridge Loans provide a convenient means for sellers to buy new homes before selling their existing homes, quickly granting loans up to 80% of the desired property’s market value.  These short term loans are often used to purchase commercial or foreclosure real estate, and to close on a property quickly.  As interim loans, the high-interest Bridge Loans are used until the borrowers can secure their next stage of long-term financing.

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There are two types of Bridge Loans.  The first option is to simply use the loan to pay off the mortgage on the borrower’s existing home and make a down payment on the new home.  That way, you only need to worry about paying the mortgage on the new home and will have the funds to repay the loan when the old home sells.  The other option is to borrow against the equity of the current home to use for the down payment—a far more complex scenario that results in a complex mathematical equation.  And remember, while you’re paying off a bridge loan, you are also still responsible for the mortgage payments on the current and new home.  

Like any other financing option, it is important to shop around for a Bridge Loan before settling on one.  Since these loans are short-term, often a lender will offer the best rates to borrowers who agree to use the lender again for long-term financing of the new home.  Usually you must pay back a bridge loan within six months, so the state of the market plays a very important role.  If the market is slow, it is quite possible that a home will not sell within the allotted time period, so you may need to renegotiate the terms of the loan.  Ask an expert about the rate that homes in your area are selling so you can make the most educated decision. 

By taking out a bridge loan, you will have more capital for a down payment and get better terms on your new home purchase.  Also, bridge loans allow you to invest quickly, thus beating other potential buyers to your preferred property. 

A Bridge Loan Works as Follows:

A borrower takes out a bridge loan to pay off his existing mortgage and uses the remaining funds to make a down payment on the new home.  The borrower sells the home and uses the funds to repay the Bridge Loan.  If the home is sold within six months of being on the market, the borrower will be credited any unearned interest payments.  If the house sits on the market for over six months, the borrower will make interest-only payments on the loan.  The expires in a year and the borrower must employ the same lender to finance his new home.

 

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Bridge Loans
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