Are you exploring short-term financing options for your latest real estate investment? In a perfect world, your primary residence would sell as soon as you’re ready to purchase a new home – but, unfortunately, that’s not always the case. That’s where a bridge loan comes in.
A bridge loan is a short-term loan intended to provide financing until a borrower secures permanent, long-term financing for their real estate investment. This option does differ from traditional loans, so evaluating the pros and cons of bridge loan financing is important to make the right decision for your situation and your budget.
Pros of Bridge Loan Financing
Bridge loans are a great solution when quick financing is necessary and long-term funding is yet to be approved. Situations best suited for bridge loans include purchasing a new house or property before selling existing property, covering expenses, funding closing costs and more.
Bridge loans grant the ability to make contingency-free offers on a new real estate investment. In a competitive sellers market, contingency-free offers (a property offer that does not depend on selling an existing property) helps ensure a competitive offer. Bridge loans are also more desirable to property sellers, as there is a guarantee on the property exchange success.
In most cases, bridge loans come with payment flexibility including potential for interest-only payments or deferred payments until you sell. Most bridge financing lenders do not charge prepayment penalties, so it’s common for borrowers to pay off their bridge loan once their current property sells.
Cons of Bridge Loan Financing
High Interest Rates
While bridge loan interest rates vary by lender, the rates are significantly higher than standard mortgage loans. Since bridge loans are short-term loans, the lender has a smaller time frame to make a return on their investment.
Two Mortgage Fees
Bridge loans are typically used to “bridge” the gap between purchasing a new property and selling an existing one. If you haven’t paid off the mortgage on your existing residence, you will have to make two loan payments until your current property is sold.
20% Home Equity
It’s important to know that most financial lenders require at least 20% equity on your existing primary residence to secure a bridge loan.
Is a Bridge Loan Better than a Conventional Loan?
Bridge loans are designed to meet a specific need – quick, short-term financing to obtain a new property. If you need to move quickly, can’t afford a down payment on a new home, or found your dream home and need to close before selling your current home, a bridge loan is a great option until you secure long-term financing. Just make sure you can afford two monthly payments in the meantime.
Who Offers Bridge Loans?
Bridge loans are available from several types of lenders including banks, hard money lenders, and other financial institutions. If you’re exploring bridge loan options in Texas or Tennessee, Loan Ranger Capital is here to help. Our team of experienced hard money lenders is committed to a quick, easy loan process and outstanding customer service.