Even if you’re an amazing saver, sometimes you just don’t have cash on hand at the exact moment when you really need it. For example, what if your dream home comes on the market at the right price, but your money is tied up in equity in your current home? Or you need to move across the country for a new job. How can you make a down payment before your own home sells?
There are plenty of circumstances where you have to move quickly to secure a deal, and sometimes liquidating assets or securing long-term funding doesn’t happen as quickly as you need it to.
In these instances, interim funding options, like a bridge loan, can help you get the money you need to get things done.
Let’s dig a little deeper into how bridge loans work: what the rates are, the pros and cons, and an alternative source of funding you may have overlooked.
What is a Bridge Loan?
A bridge loan, also known as a swing loan, gap financing, or interim financing, is a temporary loan that bridges the gap between the down payment of a new property and the mortgage balance of your previous home.
Bridge loans tend to have six- to 12-month payoff periods and typically have higher interest rates than other types of loans. Basically, a bridge loan is a short-term loan taken out by a homeowner against their current property in order to finance the purchase of a new property.
One of the most common uses for bridge loans is to put a down payment on a new home before selling a current home. If you don’t have a contract with a home sale contingency clause or aren’t able to pay cash for the down payment on the new house, you may very well need assistance to bridge that gap.
Bridge loans often use an asset such as a current home as collateral. Borrowers generally need to have at least 20% equity in their first home in order to qualify for a bridge loan.
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Benefits of a Bridge Loan
The main benefit of a bridge loan is the ability to quickly secure short-term financing without having to wait until you sell your home. You may be able to delay payments for several months and you have the option of paying off the loan before or after you secure long-term financing.
Bridge loans can be a major benefit in a time crunch: the home seller can immediately put their home on the market and use the funds to move into another house. This can be especially helpful if you’re a homeowner going through a period of sudden transition.
For example, if you have a new job in another city or are trying to time your move with the beginning of your children’s school year, a bridge loan could be helpful. Bridge loans are not a replacement for a mortgage but a temporary solution. They are generally designed to be repaid within six months to three years.
Drawbacks of a Bridge Loan
Bridge loans may help you get fast financing, but they can come with some risks. Because qualifying and being approved for a bridge loan can be a faster process than that of an unsecured personal loan, bridge loan rates and terms can vary widely from lender to lender and are typically higher than market rates for mortgage loans.
Borrowers may also encounter differences in how lenders deal with interest payments. Some require monthly interest payments while others require an upfront or end-of-term lump sum interest payment.
Bridge mortgage loans are secured with the borrower’s current home, which means it can be foreclosed on if the bridge loan is defaulted on. The standards for qualifying for a bridge loan tend to be high, typically requiring a low debt-to-income ratio and excellent credit. After all, you’re trying to prove that you can afford not one, but two homes. The short-term financing of a bridge loan can also be one of the major drawbacks.
Until you are able to sell your previous home, you’ll be carrying two mortgages and paying down the bridge loan. If you are trying to sell a home in a weak real estate market, a bridge loan can create financial strain because you might not have the time you need to let your home sit on the market and wait for a prospective buyer.
Exploring Other Financial Options
Borrowing a bridge loan can be risky. You may be required to start paying off the mortgage on the new home and the bridge loan at the same time. You’re also depending on the sale of your current home in order to pay off the bridge loan, which could take time depending on the state of the real estate market as you are selling your home. Bridge loans can be risky investments for banks, too, which means they can be difficult to get.
Due to the risks and costs that come with a bridge mortgage loan, borrowers may want to consider one of these other options.
One alternative to a bridge loan is a home equity line of credit (HELOC) which allows you to draw equity against the value of your current home in a similar way to a bridge loan.
With a HELOC you’ll usually get a better interest rate, pay lower closing costs, and have more time to repay the loan than you would with a bridge loan. It’s important to note that some lenders may not approve a HELOC on a home that is currently on the market for sale.
If you are considering borrowing a HELOC, you may want to look for one without any prepayment penalties or early closure fees, which could significantly cut into your profits in the event that your home sells quickly.
Another alternative to a bridge loan is taking out an unsecured personal loan. If you have a decent credit history and a steady income, an unsecured personal loan can be a viable option that provides additional flexibility at more competitive rates than those typical of bridge loan interest rates.
In addition, because unsecured personal loan lending is a more diversified market, you can likely find unsecured personal loans without origination fees. Personal loans, including the ones available with SoFi, are often unsecured and therefore require no collateral.
No matter what, make sure to do your homework. Thorough research is what will help you find the option that works best for your personal situation and get you the home you need at a cost that works for your budget.
And when you borrow an unsecured personal loan with SoFi there are no prepayment penalties, which means if your home sells quickly, you can pay off the loan without losing any of your profits.
Looking to move into a new home? With a personal loan from SoFi, you can bridge the gap so that you can move into your new house now instead of later.
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