Bridging Loan is a short term loan that people can get in order to buy a house before selling off their existing property. This loan bridges the gap between sale price of a new home and the new mortgage that has been taken on it. Its purpose is to provide the necessary finance for a home purchase to go through smoothly On the whole it can save a lot of money though taking it can be expensive initially. The period of the loan lasts for twelve to thirty-six months. It is tied to the equity on the existing home. The loan carries with it a high rate of interest.
How It Works
A typical situation in which it is used is when a buyer is waiting for their old home to be sold and has taken a loan for a new home. However the loan amount cannot fully finance the new purchase and some money is needed. The bridge loan fills this need for this extra money. Usually the money obtained from the bridge loan is used as down payment for the new loan. When the old property is sold off, the money can be used to pay off the bridge loan completely.
Who Would Need It?
This loan is aimed more at property developers and landlords than individuals. In recent times, however this loan has become very popular because financial crisis has resulted in banks and financial institutions refusing to offer large home loans. Mainly people who are wealthy and in need of a straightforward loan on residential property make use of this loan. It is particularly useful to those who want to sell off their property quickly and are buying a home at an auction.
Advantages Of Bridging Loans
Repayment on the loan does not have to start as soon as it is taken. The borrower can wait for a couple of months to do it. There are no qualifications required to get a bridge loan. The loan processing is very fast and this proves to be advantageous because time is critical when finalizing a deal on new property. It helps avoid delay situations caused by ‘subject of sale’ issues and lengthy waiting period in getting a wonderful property. You can request for the bridge loan to be covered into a regular mortgage at a later date. This eliminates the need to go to another lender to get a mortgage for the new home.
Disadvantages Of Bridging Loans
There are certain disadvantages to this loan and it is important to be aware of them before getting into it. This loan can cost more than a home equity loan. It can be difficult to make two mortgage payments at the same time, plus interest. In order to get this loan it is necessary to qualify for owning two homes at the same time and it is possible to not meet the criteria needed for such qualifications. The loan can be expensive as it includes administrative costs, costs for escrow, loan origination, recording, title policy and appraisal.