Pros And Cons Of Bridge Loans

pros and cons of bridge loans benefits bridging loan

A bridge loan, as the name suggests, acts as a temporary loan which allows you to obtain financing needed until you are able to refinance or qualify for a longer-term loan on properties. If you wish to obtain bridging loan financing, you should carefully consider the advantages and disadvantages of this type of property purchase funding so you can make an informed decision before committing. 

Advantages of Bridge Loans 

Bridge loan financing comes with many advantages, some of which include: Control when you purchase the property: With a bridge loan, you can acquire your desired property at any time since you are not bound by a lack of cash. For example, suppose you wish to purchase a property worth $100,000 and you have applied for long-term financing. You may know that the property is in great demand and the risk of someone else buying that property is high. So, what do you do in such a financial situation? 

A feasible option is to obtain bridge loan financing. You can then pay off the bridge loan once your long-term loan is approved. 

Get Funds Before Property Sale

If you are trying to sell your property, but you are in urgent need of cash, a bridge loan is a good option in this situation. Typically, it will take several months to sell your existing property. This can be quite frustrating if you need to free up cash in the short-term. In such situations, you can take a bridge loan so that you can meet your financial needs prior to the sale. Ultimately, once your previous property does sell, you can use the proceeds to pay off the bridge loan. 

Temporary Loan

Bridging loans are a form of temporary loan, typically spanning less than a year. Generally, your existing sellable asset acts as collateral for you to secure your loan, and it is paid off as soon as the asset is sold. No monthly repayment means that when you take a bridge loan, some lenders may not require the loan to be repaid in monthly installments, but will only ask for repayment once the asset has been sold. This can be extremely beneficial if you do not wish to bear the financial burden of making monthly payments. 

Disadvantages of Bridge Loans 

Just as there are advantages to budge loans, there may be some disadvantages, depending on the borrower's particular situation. You should consider them when deciding whether to use a bridge loan or not. Some disadvantages include higher interest rates for the lendee. You may have to pay a higher interest rate for bridge loans. Since these loans are provided in anticipation of future cash inflow, there is higher risk. As such, the interest charged for bridge loans tend to be on the higher side. 

The reduced sale price of existing property: If your existing piece of real estate doesn’t sell as quickly or at the price you expected, you may find yourself in the position of having to slash the price in order to satisfy your obligation to pay off the bridge loan. In a sense, you are hedging your bets that your collateral will sell at the rate you had initially anticipated. One important tip: If you are looking for a lender offering bridge loan financing, then ensure that the lender has been in the business for a long time and has positive reviews and testimonials from previous and existing customers.

Here is why you need bridge loans for better properties. You have to move fast in today's housing market if you want to get into the home of your dreams. In cities such as Seattle or San Francisco it's not uncommon for a buyer to receive half a dozen offers within the first day or two after putting the house on the market. Unless you have enough excess income to buy a second home without selling your current abode, you will have to play the timing game; finding a home to purchase while finding a buyer for your own. This can be especially sticky if you are buying in an area with a hotter market than the one you're leaving. 

Most sellers won't be willing to accept 'contingent' offers (you buying their home is 'contingent' on you selling your home) because of the overwhelming demand in the area manifest by the numerous potential buyers beating down their door. Under these competitive conditions, a bridge loan may be just what you need to avoid missing out on a time sensitive real estate purchase. Not sure how to go about securing a bridge loan? Eventually you will go through a bank or private lender to get a bridge loan, but it pays to know the basics before you set foot into the local loan office. 

Bridge Loan Basics 

Strictly defined, a bridge loan is a form of second trust that is collateralized by your present home in a manner that allows the proceeds to be used for closing on a new house before the old house is sold. The fact that you are not immediately required to sell your old home makes a bridge loan the logical solution for people in relatively cold markets who need to act quickly in order to close on a new home. Most people who get a bridge loan will use the extra cash to pay off the mortgage on the old home, deduct any closing costs and prepaid interest, and put the remainder towards a down payment on the new home. 

A bridge loan entails substantial risk for the lender because the old home may not sell for some time. Therefore, you can expect relatively high interest rates and short terms of six months to a year. The borrower usually begins making interest payments after the end of the term if the old house still hasn't sold. After the old home sells, the bridge loan is paid off. If the house sells within the term limit, all unearned interest is credited back to the borrower. 

Get Professional Bridge Loan Advice 

Before you sign on any dotted lines, make sure the lender you're working with has taken all the time you need to explain bridge loan details to your satisfaction. Depending on your individual situation, securing a bridge loan can be somewhat complicated. Having a relationship of trust with your lender can help simplify the process.

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