Benefits and Drawbacks of a Bridge Loan

Until recently Bridge Loans have existed in relative obscurity. Designed to help buyers who find themselves in the unenviable position of purchasing a new home prior to the sale of the existing one, Bridge Loans are structured in two ways. With the first a Bridge Loan pays off the entire existing mortgage and provides the down payment for a new home. Using the second method money is borrowed against the equity in the existing home, using this for the down payment. Terms vary greatly from one lender to the next, and Bridge Loans carry with them both benefit and drawback. Deciding on a Bridge Loan requires careful consideration.
Using the borrowers existing home as collateral, Bridge Loans typically have a six month term. In some cases they involve no additional loan payment; coming due at closing on the existing property, while in others interest payments may be charged monthly. Due to the short term nature of these loans interest rates are higher than those of more traditional loans. In some instances more than 2 percent higher than prime. Additionally, processing fees for Bridge Loans are costly. Opting for the home equity type of this loan will leave the borrower carrying two mortgage payments for a period of time.

Although other forms of financing may be less costly, Bridge Loans can be beneficial by affording flexibility other loans may not. In cases of less than stellar credit, a buyer who may not qualify for a home equity loan could be approved for a Bridge Loan based on real estate rather than personal credit score. Many times banks will not extend home equity loans on a home up for sale, using a Bridge loan allows access to the equity in your home. Often times Bridge Loans are more expedient than other funding sources. When qualifying for a second mortgage some lenders will exclude the Bridge Loan. Unlike other loans typically Bridge Loans do not require monthly payments. Using a Bridge Loan allows you to place your home on the market without any restrictions, and make a contingency free offer on a new home.

Bridge Loans do not come without risk; with the country in a mortgage crisis this may prove a very dicey proposition. Borrowers could find themselves carrying two mortgages for quite a long time. In the event the first home does not sell, even though you may be able to extend the terms of the loan, you will now most likely be making all 3 payments. Before even considering a Bridge Loan be very sure a worst case scenario isn’t going to send your first home into foreclosure.