Bridge loans are short-term financing solutions that can help you make your way towards homeownership. They’re often used when buying before selling, but what happens if the money from one sale isn't enough for both purchases? In this case, a bridge loan may be needed to get started on something new while waiting until all of our finances settle down!
What is a bridge loan?
A bridge loan is a short-term loan that helps “bridge the gap” between the purchase of a new home and the sale of the old one. It essentially allows you to use the equity from your old home to finance the down payment and other costs associated with buying a new home.
Bridge loans are typically interest-only loans, which means that you only have to make payments on the interest for a set period of time. This can be helpful if you’re tight on cash and need some time to sell your old home before having to start making principal + interest payments on your new home.
How do bridge loans work?
Bridge loans typically have a term of 6 months to 2 years, and they often come with higher interest rates than traditional mortgages. This is because they’re considered to be high-risk loans – after all, you’re essentially taking out two mortgages at the same time!
When you take out a bridge loan, you’ll likely have to pay closing costs just as you would with a traditional mortgage. You may also be required to make a down payment of 10-20% (or more).
Once you close on your new home, the bridge loan will be paid off with the proceeds from the sale of your old home. If you end up not selling your old home within the agreed-upon time frame, you may be responsible for paying off the entire loan – including any interest and fees that have accrued.
What are the benefits of a bridge loan?
Bridge loans can be a great way to finance the purchase of a new home before selling your old one. They can also be helpful if you need to move quickly and can’t get traditional financing.
Some of the other benefits of bridge loans include:
- You don’t have to make two mortgage payments each month.
- You can buy a new home without having to wait for your old one to sell.
- You can take advantage of market conditions – if prices are rising, you can buy now and sell later at a higher price.
- You can use the equity from your old home to finance the purchase of a new one.
What are the drawbacks of a bridge loan?
Bridge loans are not without their drawbacks, however. Some of the potential downsides to consider include:
- They’re considered high-risk loans, so they often come with higher interest rates.
- You may be required to make a large down payment.
- You could end up having to make two mortgage payments each month if your old home doesn’t sell as quickly as you had hoped.
- You could end up owing the full loan amount if you can’t sell your old home in time.