Introduction to Bridge Financing

Bridge financing accounts for a short-term funding solution utilized by house owners as a bridge till they close the sale of their current home. Bridge loans allow homebuyers to put an offer on a new home without having to sell their existing one. Such a financing solution comes with high costs and requires the borrower to have 20 percent equity in their old home and suits the volatile real estate markets. 

How bridge financing assists homeowners 

Bridge financing helps homeowners in smoothing out the transition from one home to the other. A homebuyer can utilize bridge financing in the following ways: 

Bridge financing acts as a short-term loan for the complete value of the present house. The buyer gets the bridge loan to pay off their existing mortgage and the excess goes towards the down payment on the new house. Once the sale of the present home closes, the house owner pays off the complete bridge loan. 

Bridge financing serves to be a second mortgage on the present house that is secured by the equity in the property. A house owner can utilize the proceeds as a down payment on the new house. The owner then pays off the existing mortgage and the home loan with the proceeds from selling their house. 

Bridge and commercial property financing act as great way to deal with the changing every changing real estate world and provide good risk/reward. By utilizing the equity in their present house, a house buyer gets to finance the down payment on a new house without requiring to close the sale of the present property. In this way, a house owner is not required to move into a temporary housing situation in case their house sells faster than they had anticipated. It can also help a house buyer get an advantage over other buyers in a rapidly moving market as they won’t be required to make a liable offer. Nevertheless, house owners that want to consider bridge loans should be aware of the chief features of this financing: 

  • The loan borrower is required to have a minimum of 20 percent equity in their present house.
  • The borrower needs to qualify to hold both mortgages.
  • The term of bridge loans is generally 6 to 12 months and they act as a short-term financing.
  • The loans have higher rates of interest and have high fees compared to a house equity loan.
  • The agriculture sector benefits immensely with the help of bridge loans. Both bridge loans and agriculture loans help farmers for buying land at auction and expanding their agricultural activities.

The advantages and disadvantages of bridge loans for homebuyers

Advantages 

  • The loans allow home buyers to shop for their new house before listing their old one.
  • The loans offer the buyer the chance to make an offer on a house whose seller will not accept any contingent offers. 
  • A house buyer gets to close the sale of their new house prior to their existing one, thereby making way for a smooth transition.

Disadvantages

  • Bridge loans can be more expensive when it comes to closing costs and interest rates.
  • The loans need a fast-moving real estate to act as a practical solution.
  • A house owner needs a minimum of 20 percent equity in their present house.
  • The house buyer should qualify to own both houses in case the present one takes more amount of time to sell than anticipated.

Rates of bridge loan

The rates of bridge loan differ depending on the lender, credit quality and location of the borrower. They will generally have both interest expenses and closing costs. Borrowers generally utilize the proceeds of the loan to pay the closing costs. These costs include Appraisal fee, Administration fee, Title policy, Escrow fee, Notary fee, Wiring fee and Loan origination fee.

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