Bridging loan is a type of financing that helps you obtain extra money to pay for the down payment of a new home or for its full payments while waiting for a new mortgage. Learn the important facts about this type of loan and how you can use it to fill the gap in your finances.
How It Works
If you’re planning to buy a house before selling your current home, you can apply for bridging loan to bridge the gap between the sale price of your new home and new mortgage.
Let’s say you are waiting for your old house to be sold for $500,000. At the same time, you have also take a loan for your new home in the amount of $500,000 but your new mortgage amounting to $400,000 cannot cover the new purchase which is $500,000. You can use bridge loan to fill the need for $100,000.
In most cases, the proceeds of the bridging loan are used as a down payment for the new house. When you are finally able to sell off your old property, you can use the sale price to pay off your bridge loan. By doing so, you can finance your home purchase smoothly and save a lot of money. While the loan carries high interest and is built on the equity of your existing home, you can still save on mortgage rates; considering that most mortgage products with low down payment charge very high interest rates. The period of the loan ranges from 1 year to 3 years.
Who uses bridging loans?
Any qualified borrower who needs quick financing while in the process of selling an old property or waiting for higher amount of loan can use this product. You can also use the money to buy a house at an auction but you’re still in the process of selling off your property.
While this loan was originally intended for landlords, property developers and commercial property investors, average consumers who need financing can access this loan. Because of the strict bank policies on documentary requirements, wealthy and average borrowers alike who need a straightforward financing on residential properties are already using this loan.
Why businesses use bridging loans
At some point of a growing business, cash flow may slow down and will affect the ability of your business to meet demands and finance its expansion plans. While those with stable income and complete financials may not find it difficult to obtain financing, it is not the same with startups experiencing some financial troubles. If you cannot produce income tax returns for three years, complete books that prove to the lenders that your business is doing well at least in the past year, your business loan application may not be approved. So, instead of waiting for your next mortgage to be approved, or for your cash flow to grow dramatically, you can apply for a bridge loan to secure the new asset you want to purchase. Don’t let small setbacks prevent your business from growing, especially if there are just financing options like Bridge loan that you can sue to take advantage of good opportunities that could boost your returns on investments.
Pros of Bridging Loans
Despite its high interests and the secured nature of the loan, you can enjoy the following benefits of bridging loans:
- Easy repayment terms – You don’t have to start paying as soon as you take the loan. You can wait for several months to make payment. This set up is particularly beneficial for those whose properties are not yet sold immediately after taking the loan.
- It has minimum qualifications – All you need to do is to prove that you have a property that you intend to sell. The loan will be built on the equity on the said property.
- Quick processing – Time is of the essence when finalizing a deal on a certain property, so the fast loan processing would be very advantageous on your part. You don’t have to wait for a waiting property before you can finalize the deal. If you’re buying at an auction, you don’t have to run the risk of losing the property to another buyer.
- Your new mortgage can cover the bridge loan – There is no need for you to apply for a second mortgage for the new home. Your regular mortgage can cover the amount of your bridge loan.
Cons of bridging loans
The difficulty of paying two mortgage payments, for the old and new property at the same time is one of the disadvantages of using this loan. It is also more costly than a home equity loan, though the loan is based on the equity of your property. Only those who have at least two properties-the old and new residential property, can qualify for this loan.
On a final note, before you sign up for bridging loan, it is advisable to determine the overall costs of the loan. Ask about the interest rates, plus costs on appraisal, administrative costs, loan origination and relevant costs, to avoid paying more than what you can comfortably pay.