Purchasing a new property or real estate while you still own your existing one is taxing on your pocketbook because the closing date for the sale of your old house does not coincide with the closing date for the purchase of the new property. The financing solution for this is a bridge loan, or bridging finance, for short-term financing. This interim financing allows you to “bridge the gap” between the closing dates of two transactions, making it easier for you to acquire that dream home without unnecessary delays.
This guide explains everything you need to know about bridge loans, how they work, and whether they’re the right short-term loan choice for your situation.
What is Bridging Finance?
Bridging finance, otherwise referred to as a bridge loan or financing loan, is short-term financing made available during transition periods in real estate. This kind of gap financing out of service is popular with homeowners wishing to acquire a new property when the existing one hasn’t been sold yet.
The bridge loan is secured against your current home and usually finances a down payment on the new property. It will also include other associated closing costs, such as closing costs and lawyer fees. The loan is meant to provide gap financing to bridge the financial shortfall until the down payment and the sale of the old home are complete.
How does bridge financing work?
How the funding process to qualify for a bridge loan works is straightforward:
Loan Approval: A bridge loan borrower will apply, usually with a mortgage broker or a private lender.
Using Equity: The lender assesses the equity in your current mortgage and home equity loan amount to determine the bridge loan amount you qualify for.
Funding: The funds are disbursed once approved to be used as a down payment or to cover costs on the new property.
Repayment: This loan is repaid when the present home is sold, which usually occurs within the first line of credit first mortgage, or second mortgage, and a short period of 6 to 12 months from the real estate purchase close date.
Main Features of Bridge Loans
Collateral: Tied to your current home.
Loan Terms: Usually short-term loans with a higher interest rate than regular mortgages.
Repayment Options: Some loans require monthly interest payments, whereas others are repaid in full (with interest) following the sale of the current home.
Types of Bridge Loans
There are two primary types of bridge loans:
1. Open Bridge Loan
For homeowners with a confirmed sale agreement for their existing home.
They must expect higher interest rates since most banks and traditional lenders consider it riskier.
Flexible repayment terms but needs to have good financial stability.
2. Closed Bridge Loan
Has a fixed selling date or purchase agreement on the home sale of the current home.
The other traditional lenders require the offer of bridge loans and bridge loan interest rates for financing, and bridge loan interest rates are lower. The reason is that the lender is fairly certain of its next payback.
It is ideal for people whose home has/have a confirmed closing date.
Benefits from the Bridge Loan
1. No Pressure for Timeliness
A bridge financing loan or lenders offer a bridge loan amount of financing loan allows you to offer a lenders offer bridge financing loan for financing during a gap between when you will have bought and sold, thus avoiding any rush in decisions.
2. Competitive Advantage in the Marketplace
Using bridge loans and financing, you will be able to your existing home with an equity loan to make a larger loan stronger and offer a down payment on a new property, especially with competitive houses in the housing market.
3. Flexibility in Moving
Some homeowners may use the loan to put the funds towards repairing or renovating the old home to boost its resale value.
Reasons and Risk Factors
1. Higher Interest Rates
The interest rates on most bridge loans now are higher compared to other loans because they are short-term loans with greater risks.
2. Additional Costs
Additional costs will arise for long-term financing from a flat administration fee, legal fees, and origination fees, thus implying increased costs generally for longer loans.
3. Repayment Pressure
This can put a load on the finances or result in a need to roll the loan over for a longer period at a higher interest rate.
4. Qualification Criteria
Typically, most lenders, including conventional lenders, require significant home equity and a solid financial profile to qualify for a bridge loan.
Steps to Apply for a Bridge Loan
Assess Your Financial Situation
You must have enough equity in your home and be able to afford the interest payments during the loan period.
Research Lenders
Seek lenders, especially small lenders, and private lenders, that offer competitive terms.
Prepare Documentation
You will need proof of income, credit history current mortgage amount, your current mortgage details, and the agreement on buying a new property.
Negotiate Terms
Discuss loan terms, which include interest rate, repayment structure, and additional fees.
Finalize the Loan
When the application is approved, the lender will disburse funds to cover your total down payment and other costs on your new property.
Alternatives to Bridge Loans
If none of these options suit your current situation, consider these alternatives:
1. Home Equity Line of Credit (HELOC)
Use the equity of your current home to establish a line of credit, often with a much lower interest rate than a bridge loan.
2. Personal Loan
Sometimes an unsecured loan will provide short-term funding, but it often carries a higher interest rate.
3. Contract Contingency Clause
Include a contingency in your home purchase agreement that makes the purchase contingent on selling your current home.
Is Bridge Financing Right for You?
Bridge loans typically work best for homeowners who own two properties:
Have significant home equity.
Confident in selling their existing house within a short timeframe.
Try to avoid the inconvenience of coordinating closing dates.
The drawbacks to sellers, however, are not ideal, especially when home sales are in a slow real estate market and when the existing home needs extensive repair work.
Frequently Asked Questions About Bridge Loans
1. What does bridging finance mean?
Bridging finance lenders offer most bridge loans a bridge financing a bridge loan is a very short-term loan for-term finance used when buying a new home and waiting for the money from the old one.
2. How do people use bridge financing in Canada?
It acts as a full pledge on your present home, using its equity to pay for the down payment and other expenses for the new place; it is paid back when the present home is sold.
3. Interest Rate on a Bridging Loan:
The rate differs but is generally higher than for traditional mortgages; the rates go from 6% to 12% according to the lender.
4. Is a bridge loan worth it?
It’s a lifesaver for most homeowners when in a tight spot, but its value depends on market conditions and how fast one sells the current home.
5. How Do You Repay a Bridging Loan?
Bridging loans are smaller lenders’ traditional loans usually repaid in full after selling the existing property.
6. What is the Difference Between a Bridge Loan and a Traditional Loan?
Bridge loans typically are short-term, higher-interest options for transitional periods, while traditional loans offer more, with long and short-term financing, long-term funding full-term, long and short-term loans, and financing full-term funding.
Conclusion
Bridge loan terms and loans are indispensable to homeowners who want to purchase another home before the sale of the existing one. They not only enable the filling of the financial gap but make the whole transaction less stressful in the case of buying and selling homes. Using a bridge loan allows you to avoid timing pressures, secure your dream home, and even prepare your current property for sale, further enhancing its value in the market. But do keep in mind that the cons of bridge loans have particular terms, high interest rates, and hefty repayment conditions. So, before applying for a bridge loan, take time to plan as part of your short and long-term financing, bridge loan terms and long-term financing will align well with your financial planning goals and timeline.
While bridge loans and loans can be a highly worthwhile benefit to you, they might not be the best fit in more volatile markets or where your current home needs extensive repairs before it is sold. Other alternatives to home equity loans, such as home equity lines of credit or negotiating contingency clauses, are also worth considering.
However, if you are interested in bridging finance between two mortgages, it will be of paramount importance to work with a trusted partner. Shelto Mortgage has the expertise to guide clients through available options for bridge mortgage brokers, bridge loans to, mortgage customers, loans, and financing that best suit their needs and ensure a smooth transition from one home to another. Contact us today to get the open mortgage move started!
