For almost a century the idea of owning a house has been one of the key pillars of the American Dream. For many decades it’s been acting as one of the ultimate goals that everyone aspires to. But one important aspect that nobody tells you about this dream is that there is always going to be another dreamed house, life changes and economic cycles will also influence individuals into aiming for something better.
In the past, if you had a property and you decided to list on the market in order to buy something else, you would have had to wait until the first house was sold before even been able to search for your new home. Take into consideration that this might not be the case if you had the cash to buy the second one without selling first, but for most Americans, it was not the case.
The idea behind a bridge loan is to act as a lending vehicle that will help you borrow the money that you will get from selling your current property and appoint it towards buying your new house. It is a very straightforward type of loan and it typically only acts as a short term borrowing vehicle, allowing individuals to get financed for a period of time that could range between 2 weeks and 3 years.
This borrowing vehicle has become one of the backbones of the entire housing market, allowing individuals to change between properties without the hassle from the past.
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For this specific article we focused solely on real state bridge loans, it is important to mention that this type of borrowing vehicle is also utilized for working capital, equipment acquisitions, and even debt refinancing.
What are the Pros and Cons of Getting a Bridge Loan?
Depending on your situation a Bridge Loan could become your best savior or your worst enemy if not used appropriately. It is key to understand that many individuals get lured by the idea of buying a better house and they actually forgot about the consequences that the wrong structure might have to their finances and their life.
A bridge loan is a great structure, the problematic rises when individuals who were not qualified get their hands in this type of borrowing vehicle. Before even considering a BridgeLoan over any other type of financing, it is important for you to understand what are the pros and cons of borrowing money with this product.
- Freedom of House Hunting: A bridge loan will allow you to search the market with the freedom of knowing that you will be able to make an offer without selling your first property. This might be a great option for anyone who is interested in an x property but knows money won’t be available on time. Choosing a new home is not an easy task, and there is nothing worse than seeing a place that has all the features you are looking for and missing the opportunity simply because of time.
- Short Term Lending: It is great to know that your commitment won’t be for too long, while there are other options that might cover this type of scenarios, in most cases, it would commit you for a longer period of time. Depending on your income, it is not savvy at all to be dealing with two properties at the same time, plus the cost of financing.
- Eliminate the cost of Moving Twice: Moving out can be a complicated and traumatic experience, no only you are living memories in your old house but it is also a real headache once you take into consideration all the preparation and effort it takes. One common practice in the US has been to sell your property, then rent while you find you’re a new house. While this might save you the fees of a bridge loan, it certainly is more expensive down the road. If possible, you should totally consider avoiding the hassle of moving to a temporary place just to move again a couple of months or weeks down the road.
- Stronger Purchase Offer: If you are selling your house one of the worst news you can get is to receive and offer that has a contingency attached to it. This means that while someone is interested in buying your property, their offer depends on their ability to sell an already existing property. For most sellers, this would be considered as a weak offer and someone offering less money than you could easily win any bid. By eliminating the contingency and putting cash in your hand, you would be able to make a hard offer on any property of your interested. It is important to mention that this benefit both the buyer and the seller as the transaction will take place in a much smoother and faster way.
- High-Interest Rates (Fees): This might be the best choice in terms of effectiveness and how smooth the process might be, but it is certainly not cheap… at all!. Before even considering about getting a bridge loan you should understand your finances very well in order to determine if you can afford it. Since it is a short term loan, but a high risk one, most institutions will take advantage by charging obscene fees and extremely high-interest rates for the transactions.
- Overall Debt Increases: You should keep in mind that while the first property acts as collateral while it is sold, this means that overall you are acquiring more debt. It is key for you take into consideration the fact that depending on how long it takes for your first property to be sold, you might end up paying for a mortgage and a bridge loan at the same time. This can be incredibly expensive and if not planned properly, it can put you in a very complicated and bad position both financially but also emotionally.
- Risky Contingency: Unless you have a confirmed and committed buyer that is simply waiting for a credit deposit to expire, the transaction won’t be risk-free. Take into consideration that commitment letters can be broken in certain scenarios, and once again you don’t want to be the one holding to mortgages at the same time.
The best advice I can provide is for you to take your time analyzing your own scenario in order to determine if a bridge loan is even a good idea based on your situation. If you are dealing with a good realtor, they might be able to advise you based on their experience but it is still recommended for you to take some time with a financial advisor before making any decision.
Bridge Loans Vs other Competitive Loan Lenders
Bridge is a different loan lender in the sense that it seeks to fund the purchase of your new home if you are relying funds from selling your current property. Generally, the lenders help bridge the financial gap between owning a new home, hence its name – “Bridge”. Let’s compare its loan limit, interest rates, credit score requirement, and repayment period to different lenders such as Tittlemax, Ace Cash, and Opploans under the same criteria