If this is your first time homebuyer (or already own a home), you’ve heard of mortgage loans. You have your conventional loans, FHA loans, VA loans, USDA loans, and so on. But there is another type of loan that not too many people are familiar with that can make the home buying process a lot easier. Yes, we are talking about a bridging loan. Haven’t you heard from them yet? Put simply, a bridging loan bridges the gap between sales. Homebuyers use these temporary loans to finance their new home while they wait for their current home to be sold. Got it?
How does it work?
Not every lender packages a bridging loan the same way. When it comes to these loans, it is important whether or not they are useful for the specific goals and needs of the individual. However, there are two popular options that lenders are using with buyers.
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The first option is for a lender to provide funds equal to the difference between up to 80% of the buyer’s home value and their current loan balance. The second mortgage goes towards deposit for the second house, while the first mortgage stays the same until the house is sold and the mortgage is paid back.
The second option is for buyers to take out a loan for up to 80% of the value of their home. With this money they pay off their first mortgage. The funds for the second mortgage are then applied to the down payment for the new home.
As with any loan, there are positive and negative aspects. The main benefit of a bridging loan is that buyers can make an “unforeseen offer” on a new home without selling their existing one. This means buyers don’t have to wait to buy their dream home until their old one is sold. Even so, a bridging loan has higher interest rates and only lasts anywhere from six months to a year. And even if your home doesn’t sell during that time, you’ll have to pay back your loan. You must also qualify for two houses and be able to afford two mortgage payments at the same time.
Should you apply?
There’s no denying that a bridging loan can come in handy when you’re ready for a change but don’t want to risk a conditional offer. A bridging loan can also be a great way to finance a new home in case you need to move for a job. However, a bridging loan comes with a higher interest rate. In fact, most of the bridging loans are somewhere between 8.5% and 10.5%. Also, paying off two mortgages and making payments on your bridging loan can be stressful – especially if your existing home isn’t selling as quickly as you hoped it would.