Taking out a bridge loan may be a popular option to purchase a home may seem quick and easy but it comes with a risk. One must keep in mind the various factors and get educated prior to taking out a short term bridge loan. A bridge loan is generally used for a short period of time to cover the purchase of a home while the buyer waits to sell their old home.
Some benefits of using a bridge loan include the ability to buy a new home at the same time one puts a current home on the market, the potential of gaining a few months free of payments, and the chance of buying a new home despite removing the contingency to sell under certain circumstances. However, there may be certain disadvantages such as the bridge loan being more expensive than a home equity loan, the qualifications that must be fulfilled to meet the criteria to own two homes, the stress of handling two mortgages at the same time, and the interest that comes with the bridge loan.
The way that bridge loans work is that lenders have the ability to choose if they want to set guidelines for minimum FICO scores or debt-to-income ratios. Lenders instead use the method of deciding what makes sense rather than using a formulated approach. The long-term financing on the new home is essentially the only part that requires formulated guidelines. Furthermore, the bridge loan payment is omitted by some lenders who make conforming loans. That is done for qualifying purposes and takes into consideration whether the borrower meets the criteria. Conforming loans are easier for lenders to work with when it comes to funding home mortgages. It’s so simple that it can be processed via an automated system.
When it comes to finding specific interest rates on bridge loans, rates can vary depending on the lender and the location. Interest rates can accumulate once a home is sold despite the borrower not having to pay for a couple of months, for example. Fees can also vary and rates can change over time.
What’s more, short term bridge loans also come with loan origination fees. One should always take this consideration to avoid spending money that wasn’t planned to be spent. The fee amount relies on the value of the loan amount. Generally, each point of the origination fee is about 1 percent of the value of the loan. Looking back on all of this, it is safe to say that home equity loans are generally less expensive than bridge loans. However, bridge loans may offer great benefits for some borrowers. If a home is on the market lenders won’t often lend a home equity loan to borrowers.
Overall, if one’s home hasn’t already been sold and buying a home is deemed too expensive at the moment, one can use either a bridge loan or a home equity loan. These two methods may be for someone who is waiting to sell an existing home or don’t have enough money to provide a down payment on another mortgage. If there is a high chance the existing home will sell, bridge loans may be very beneficial in helping to avoid offers that only workout once the home is actually sold. This is also the case if one has a plan in place in case the home doesn’t sell. Contingent offers are not often accepted by sellers in a seller’s market. Move-up offers are truly made more appealing through the use of short term bridge loans.