Just as it is easier to get a job when you have a job, it is easier to buy a home when you already own a home – if you get a bridge loan. However, just as you need to leave your current job for a new job, with a bridge loan, you are required to sell your existing home to finance the purchase of your new home. Bridge loans allow home owners to use up to 80 percent of the value of an existing home for sale as a down payment for the new home. A bridge loan provides several advantages to people wishing to transition to new homes.
Easier to Finance New Home
A bridge loan is a short-term loan that acts as a bridge between the loan on your existing home that you are selling and the new home that you are buying. It provides funding for the down payment on a new home by borrowing off the equity in the existing home.
A bridge loan saves time because it is designed to generate funding for a new home purchase when the existing home has been sold, but settlement will not occur until after the new home purchase is complete. The great benefit of the bridge loan is that it allows you to use the net equity from the existing home sale, prior to it being realized, as down payment for the new home. Another time-saving benefit is that you can move into your new home over several days, rather than moving immediately from the old to new home on the closing day.
Ability to Choose Repayment Options
Most mortgages force borrowers into long-term options. However, with a bridge loan, borrowers have the choice of repaying the bridge loan either before or after the permanent financing is secure. When a borrower repays the loan before, she can either repay it in full or in structured payments over a fixed time period. If you make your payments on time, your credit rating will improve, which can make you eligible for a loan that you normally might not qualify for. When the borrower chooses to repay the loan after the financing is secure, a portion of it is used to pay the off the bridge loan.
Disadvantages of a Bridge Loan
Interest rates generally run 0.5 percent to 1 percent higher for bridge loans than they do standard, 30-year fixed-rate mortgages. Borrowers must pay interest on the bridge loan for six months out of the proceeds from the existing home sale. Since there are two home sales occurring, selling one home and purchasing another, two closings with individual closing costs are required.
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