What is a Bridge Loan in Real Estate? A Guide for Borrowers
If you’re buying to a more expensive home, financing the purchase is likely to be one of your top concerns. Fortunately, there are measures you can take to make the transition more manageable. One option is known as a bridge loan. What is a bridge loan in real estate? As the name implies, it helps bridge the gap between selling a home and buying a new one. Before you decide if it’s right for your situation, learn more about what goes into this type of lending agreement.
The Basics
A bridge loan assists buyers who do not have the immediate funds necessary to purchase a home. The loan serves as a “bridge,” because it provides immediate cash flow before a homebuyer has more permanent finances for their purchase. This happens when the buyer’s current home is already on the market, and they’re waiting for the property to sell. The buyer’s existing home serves as collateral in the agreement.
The Benefits
This type of loan isn’t for everyone, but it’s useful when a homebuyer is certain that they want to make a real estate purchase, and they are confident their current home will sell. The loan allows this person to put his or her home on the market immediately without restrictions.
There is no need for the buyer to place a contingent offer on the home they’re interested in, because they have immediate access to the necessary funds. Payments for bridge loans can often be delayed if necessary, and interest is typically forgiven if the borrower’s home sells before the terms of the loan are complete.
The Drawbacks
Bridge loans can be expensive for the buyer. While interest rates vary depending on the lender, they are usually relatively high for a bridge loan. You can expect to pay 2% above the average fixed rate. In addition to steep interest rates, a bridge loan comes with other costs including administration, appraisal, escrow and title policy fees. These costs can quickly add up to several thousand dollars.
There are never any guarantees that a home will sell quickly, so if you’re taking out a bridge loan, it’s important to be aware of this risk. It’s necessary to research how long homes typically stay on the market and the prices they sell for in your area if you’re planning on using this type of financing. A problem that many borrowers run into is that they take out a bridge loan because the real estate market is slow, and it remains that way long after their purchase. No matter what condition the market is in, it’s best to only take out a bridge loan if it’s absolutely necessary.
Make Selling Easier
If you’re taking out a bridge loan, selling your home as fast as possible will be your top priority. In order to hasten a sale, you will need to ensure that your home looks its best to potential buyers. Check out our blog post about the importance of curb appeal, and get tips for improving the looks of your home’s exterior. A few small changes could make selling your property a whole lot easier.