Bridge loans to your new house

 If you are going to buy a new house before selling your existing one, where will you take money for a down payment? One of the common ways to finance your new purchase is to take a bridge loan. They have become popular because sellers have increased difficulty to sell their property in a short time frame. However, be careful. The interest rates are high, and there are a lot of additional costs and fees involved. Read more about all sides of bridge loans to make a more educated decision. 

Bridge loans characteristics 

As the name suggests, bridge loans "bridge the gap" between times when you need financing. In the case of an individual, they are common in the real estate market. For example, imagine that you find a great property - at a great discount. If you can’t complete the purchase quickly, your perfect "move-up" home will be offered to other buyers. 

That’s where bridge loans come in. Also known as swing loans, gap financing, or interim financing, they can help you bridge the gap between the sales price of your new dream house and new mortgage or the proceeds from the sale of your currently owned property. 

A bridge loan can be also granted to businesses. For example, you can take it to buy commercial property (like a store or a restaurant), fund completion of the project that promises to be very profitable, carry your company while searching for a larger investor, or ensure non-stop operation during a time when you business partner leaves. 

Financial terms

Bridge loan is a short-term loan taken out for 6-12 months. It is backed by some form of collateral, for example the buyer's existing home. Loan-to-value (LTV) ratio doesn’t exceed 65%-75%, based on appraised value. If a borrower has down 30+% in cash, the LTV max can be stretched.

Bridge loans usually come from investment pools or private companies that make a practice of the higher-interest loans. For example, you can browse through http://www.kennedyfunding.com, http://www.avatarfinancial.com, http://www.1stbridge.com, http://www.sncloans.com, http://www.northshorefunding.com, http://www.centuryhousing.org to find suitable offers. 

The loan amount ($100,000 - $500,000; in some cases up to $3,000,000) is typically paid back when the existing property is sold or permanent financing is obtained with a traditional lender – a bank or a credit union. 

Drawbacks of bridge loans

Bridge loan interest rates are relatively high in comparison with other types of financing - 8-12%. Plus, add points and other costs: administration fee, appraisal fee, processing fee, escrow fee, title policy fee, notary fee, recording fee, drawing fee, etc. – up to $4000. A loan origination fee is based on the loan amount. Each point is equal to 1%-2% of the loan amount as compensation for structuring the deal.

Bridge loans help customers meet their current financial obligations by providing immediate cash flow. However, they are more expensive than traditional financing: 2%-5% above the average fixed product. If you don’t want to get into financial troubles, consider cheaper alternatives: 401K, stocks or bonds, insurance policy, or other loans secured by fixed assets or receivables.