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? How can you make a down payment before your own home sells?
Here’s another common scenario: You need to move across the country for a new job. How do you get in the door of a new home before you’re able to tie up loose ends where you used to live?
Or you might just have discovered the greatest real estate deal at auction—how do you get the cash you need quickly?
There are plenty of circumstances where you have to move quickly to secure a deal. And sometimes getting ahold of liquid assets or 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.
They tend to have a six to 12-month payoff period and come with 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.
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Bridge loans are commonly used to put a down payment on a new home before selling a current home. And assuming you don’t have a contingency contract or an extra couple hundred thousand dollars in the bank, you may well need to bridge that gap.
Bridge loans often use an asset like a current home as collateral. Borrowers need to have at least 20% equity in their first home in order to qualify for a bridge loan.
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 move into another house. This can be especially helpful if you are a homeowner going through a period of sudden transition.
For example, if you have a new job or have children who need to switch schools soon, this could be necessary. 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 come with some risks. Because qualifying and being approved for a bridge loan can be a faster process than unsecured loans, bridge loan rates and terms can vary widely from lender to lender. Typically, the interest rates on bridge loans are at least 2% higher than market rates.
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 to the borrower’s existing home, which means your old house can be claimed in the event of defaulting repayments. The standards for qualifying for a bridge mortgage tend to be high. After all, you’re trying to prove that you can afford not one, but two homes.
Many lenders do not actually have a set credit score requirement or a maximum debt-to-income ratio. Most of the time, your ability to qualify will depend on your future home purchase and the long-term financial benefits the lender predicts.
The short-term financing of a bridge loan can also be one of the drawbacks, and can lead to financial stress. 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.
Exploring Other Financial Options
Borrowing a bridge loan can be risky—you may be required to start paying off your mortgage and the bridge loan at the same time. You are also depending on the sale of your 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.
If you are planning on taking out a bridge loan to cover the cost of a new home, you may want to negotiate for the extension of your bridge loan in the event that your home does not sell in a timely manner. Bridge loans can be a risky investment for banks too , which means they can be extremely difficult to get.
Due to the risks and costs that come with a bridge mortgage, borrowers may want to consider 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 many lenders will not loan a HELOC on a home that is currently on the market for sale, so it may require advance planning.
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.
Using a Personal Loan to Cover Your Transition
Another alternative to bridge loans is borrowing a personal loan. If you have decent credit history and a solid income, you may consider applying for a competitive-rate personal loan, especially bridge loan interest rates can run fairly high .
In addition, because personal loan lending is a more diversified market, you can likely find personal loans without the expensive origination fees. Personal loans, including the ones available with SoFi, are often unsecured and therefore require no collateral.
And when you borrow a 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.
No matter what, make sure to do your research. As long as you do your homework, you can find the option that works best for your personal situation, so you can get the home you need at a cost that works for your budget.
Looking to move into a new home? With SoFi personal loans, you can bridge the gap so that you can move into your new house now instead of later.
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