If you or some of your loved ones are in the process of planning your move, but if you haven’t yet sold your current property, you or they might be suffering from strained finances. Moving on its own is difficult – and expensive – enough without adding in other financial stressors that might be tapping your reserves as well.
If this sounds like a familiar situation, you may want to consider taking out a bridge loan. This type of loan is considered one of the best when it comes to providing some financial ease on your housing journey.
Bridge Loan: A Definition
A bridge loan is a loan that you will take out on a short-term basis. It is called a bridge loan because it is meant to bridge the gap between you receiving the money from your home sale and being required to pay money towards your new home (particularly, the down payment on your home).
In most cases, you’ll receive the loan and have flexibility with the borrowing for up to a year. These sorts of loans will use your home and other assets as collateral, so ensure that the sale of your old home will more than cover the costs of your new home and repaying the bridge loan. Interest-wise, you’ll likely be looking between 8% and 11%, which tends to be quite a bit more expensive than other – longer-term – financing options.
Despite this, the process for getting a bridge loan tends to be easier and quicker than other loan application processes, so if a lack of money and time is stressing you out, applying for a bridge loan can be a great idea.
Bridge Loans: The Basics
Before anything else, you must be approved to receive the bridge loan.
As with most other loans, the largest determinants for being approved or rejected will come down to your current income and credit score. This information will prove if you have a history of on-time payments, and it will also ensure that you have the right amount of incoming funds to pay back the loan.
This is the same for a bridge loan. If you have a good history of mortgage with your previous home(s), you will be a much stronger applicant, as well.
Once you’ve been approved, you can use that money to cover the costs for the house down payment or other initial financial necessities. However, once you begin to use it, you should also begin to consider that you will need to repay it, typically within a year.
This period allows you to structure your repayment so that you can use the money that you received from the sale of your original home to repay the bridge loan. You must speak with your lender to ensure that you have all the details regarding how and when you will be repaying your loans so that you’re not hit with penalties or any hidden fees.
If you’re in a situation where you need money – fast – to secure a home with a down payment, then the bridge loan is a great option. So long as your current home will sell within the period of your loan repayment agreement, there are few risks and many benefits to taking out a bridge loan.
Do yourself a favor and remove “financial worries” from your moving journey. You’ll thank yourself for it.