Bridge Loans for Home Purchase: Are They a Good Idea?
A little more than one-third of all U.S. homeowners have a free and clear title without a monthly mortgage payment.
If you’re one of the many Americans who need a home loan to purchase a house, you probably have been thinking about your mortgage options.
Besides fixed-rate and adjustable rate mortgages, there’s another type of loan called a bridge loan.
Have you heard of bridge loans for home purchase? Are you wondering if they’re a good idea? Keep reading and learn more about these types of loans.
What is a Bridge Loan?
When you have to move for a job or other reason, you may not be able to sell your house before buying another one in your new location. When this happens, you can get a bridge loan.
A bridge loan helps solve the financing problem that may arise when you find yourself in a position where you end up with two homes. These short-term loans, usually 6 months to a year, provide cash flow to the homebuyer during this transitional period.
These loans allow buyers to get additional funds or use equity from their current home before a sale is complete. This comes in handy in a tight market. Bridge loans eliminate the need to make an offer contingent on selling the current home.
Reasons to Get a Bridge Loan
Let’s take a look at some common reasons to apply for a bridge loan.
- can’t afford the down payment on the new house without selling the current home
- sellers in the area are not accepting offers with contingencies
- trying to purchase a new home quickly
- prefer to buy a new home before listing the current home
- closing dates are not lining up
These loans tend to come from the lender that is financing your new home purchase.
Good Idea or Not?
We’ve talked about the reasons for seeking this type of loan and it sounds like a smart idea, but is it? While these loans help “bridge” a gap in your real estate dealings, there are some negatives involved.
The interest rates are higher. Trying to manage two mortgages is stressful. You have to have at least 20% equity in your home. The lender may require you to use them to obtain your new mortgage.
What will you do if you have trouble selling your property? It could end up in foreclosure.
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Bridge Loans for Home Purchase
Depending on your circumstances, bridge loans for home purchase can give you the cash you need to spend on a new home while waiting for the other home to sell. Remember when you get a bridge loan you might end up having to pay off multiple loans at the same time.
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