Bridge Loans: What are they?
Are They an Answer?
Many of my past clients and new clients alike have gotten in the homebuying mood now that we're on the backside of the pandemic. They're contemplating taking advantage of the (still) low interest rates and becoming homebuyers soon ... or homebuyers again.
Those hoping to become repeat buyers are reaching out to me to learn what options they have to become step-up buyers, investment buyers, or downsize to another home. One question popping up with more and more frequency surrounds "Bridge Loans".
They want to know:
- Will a Bridge Loan be a panacea and provide them an answer to address the challenges they're facing?
- Will it help them as they simultaneously try to sell their current home and buy another?'
It's hard to provide a quick definitive answer to their questions. Fact is, for some, a Bridge Loan may be the perfect remedy. For others, no.
As with most things, (especially with mortgages) the answer lies buried in the details and specifics of the question's scenario. Some fact-finding must be conducted first. Questions must be answered. Facts, details, and information must be provided to me.
Why the uptick of interest in this particular loan?
It's my belief that the rise in interest in Bridge Loans is directly tied to the state of many current U.S. housing markets, that meaning "hot, fast, and "competitive". The need for solutions to address the current market has many considering all options possibly available.
In these hot markets, it's now become quite common for sellers to receive multiple offers on their homes within hours or minutes of placing them up for sale. And that's creating real challenges for those hoping to become home buyers at the same time they're home sellers.
It's also heightened the importance of the content, execution, and timing of a contract. The "how and when" of a new offer has become critically important. It dictates how seriously a seller considers an offer and if a signed contract is the outcome.
Because of the hot competitive nature of markets and the speed at which offers are occurring, something that occurred fairly commonly in the past ... contract offers containing sale contingencies ... has become almost obsolete.
This is leaving home sellers in somewhat of a pickle. What is a positive for them in their role as a seller accepting contract offers is now a negative for them as a buyer submitting one.
This can be an extremely frustrating and unnerving situation for some clients. Seeing that, it's typically at this point in the negotiations that realtors are raising Bridge Loans as a possible solution.
Why? Two main reasons:
- Down payment funds
- Closing cost funds
Until they close on the sale of their current home, many clients find that their "working" money ... the money they would use for a down payment and funds to close on a new home purchase ... is tied up and unavailable to them.
Also of concern ...
The mortgage still held on the home they live in currently. The one for sale. In most cases, the one they are still obligated to making monthly payments on.
In short, their equity ... and subsequent funds for downpayment and closing ... are still "locked up". In many of these situations, agents are suggesting Bridge Loans as a solution to the dilemma.
- What are Bridge Loans?
- What are their pros?
- What are their cons?
- Will they provide the assistance these sellers need?
Note: Moving forward in this article, I will focus on Bridge Loans only as they apply in this particular borrowing (sell and buy) scenario ...
First, Bridge Loans are ... just as the name suggests ... loans that get you from (or bridge) Point A to Point B. They can provide funds during a short-term gap of time.
They can assist the seller-buyer in tapping the equity that exists in their present home at that time. These loans allow them in essence to basically borrow the down payment for their new home purchase.
Bridge Loans are often utilized for mere months (6 to 12 months), or only as long as the seller-buyer needs to complete their transactions successfully. They can, however, have longer terms. It all depends on the conditions of the Bridge Loan secured.
Because there are multiple types of Bridge Loans, differences can exist in loan terms. So, it's very important that a borrower is privy and fully educated as to the terms of the Bridge Loan they are securing.
Bridge Loans are also:
- Most often secured using the borrower's CURRENT home as collateral
- Carry an interest rate of Prime Rate + (in varying degrees)
- Issued by the mortgage lender that will finance the borrower's new purchase as well
The Pros of Bridge Loans:
- If the borrower qualifies for a Bridge loan (in order to provide the down payment funds for the next purchase), they are in effect taking out some of the equity in their home in advance of selling it
- They allow borrowers to make an offer and buy a home WITHOUT A CONTINGENCY. That can be absolutely critical in today's competitive market
The Cons of Bridge Loans:
- Borrowers give up the amount of equity equal to the Bridge Loan PLUS the closing costs of that loan when they eventually sell
- Borrowers must understand: They could possibly end up with two mortgages plus the Bridge Loan for as long as it takes to sell their current home
- NOT all loan companies or banks even make Bridge Loans. An assumption of availability can be a mistake
- Up to only 80% of your home's value (LESS the amount you might currently owe) can be obtained with a Bridge Loan.
- The amount of loan secured needs to be sufficient for the down payment if NOT using any other funds from your savings
As you can see, there is much to know and understand about Bridge Loans. Again, I urge that all borrowers considering this type of loan gain a thorough understanding of the Bridge Loan under consideration prior to making any final decision regarding its use.
Borrowers must keep this in mind: In this particular selling/buying scenario, these loans must be executed properly in order for clients to reap the benefits they need and desire. Timing is also of concern.
Borrowers should also pay special attention to the costs and terms of the Bridge Loan under consideration. As stated above, typically Bridge Loans are costlier to obtain. They are also only short-term in nature too.
I recommend that a full evaluation of financial options available to the clients be conducted by their lender prior to any final decision being made. If other funds are available to the client, tapping those funds may be a better (and less costly) option.
Those financial options that should be evaluated can include:
- Retirement monies
- Stocks
- Savings
- Home Equity Loans
- More ...
Are you hoping to Buy, Refinance or purchase an Investment Property in New Lenox, Will County, or elsewhere in the Chicagoland area/IL/WI?
Contact me! I'll put my 40+ years of Mortgage experience and expertise hard to work on your behalf.
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Referrals are Appreciated and Welcomed
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