The Pros And Cons Of Bridge Loans

Date August 9, 2017

If you’re looking to buy a new home, you may be counting on the proceeds from the sale of your existing home to help cover the down payment and closing costs.

What happens if selling that home takes longer than you’d anticipated? What if you need to move quickly? How will you be able to come up with the necessary funds if your home doesn’t sell quickly?

This is where bridge loans come in. A bridge loan provides temporary financing until more permanent financing can be obtained. It is granted with the understanding that, once permanent financing is in place, some of those funds will be used to repay the loan.  Bridge loans have shorter terms and are more expensive than conventional loans.

Terms of bridge loans vary tremendously. Some completely pay up the outstanding mortgage on the old home, while others only pay off a portion of it, leaving the borrower with two mortgages, or lumping the loans together.

Here’s a look at some of the pros and cons of bridge loans:

Pros

1.) Freedom to house-hunt

The most obvious benefit of taking out a bridge loan is also the most significant. With this financing in place, you’ll be free to buy the home of your choice without being bound by the sale of your previous home.

2.) Short lending term

Bridge loans usually run for six-month terms. In contrast, most conventional loans are structured around a decades-long payback term, increasing the possibility of the borrower suffering a financial setback that makes repayment challenging.

Cons

1.) Total debt increases

An increase in debt always means an increase in monthly financial obligations. A bridge loan often splits the new home’s mortgage, leaving the borrower with two — or three — monthly mortgage payments, creating a tremendous strain on the borrower’s monthly budget.

2.) High interest rates and fees

Bridge loans generally have high interest rates, generally reaching between 8.5 – 10.5% of the total loan. There are also various fees involved, such as closing costs, origination fees and more.

3.) Risky contingency

Bridge loans are usually extended with the understanding that the sale of your home will help you repay the loan. If your house doesn’t sell before the loan is due, you’ll be left with a huge debt you can’t repay.

Speak to a Realtor about market conditions before taking out a bridge loan. Make sure the odds are in your favor before committing to a loan that is contingent on the sale of your existing home.

If the thought of taking out a bridge loan makes you uneasy, consider taking out a HELOC, borrowing against a 401(k) plan, or taking out a loan that is secured by stocks or bonds.

Don’t forget to call, click, or stop by [credit union] for guidance throughout the process of buying and selling a home.

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