In today’s economy, a little financial help is always welcome. This is particularly true during emergencies, which can take a significant chunk off of your monthly budget.
Another situation when you’ll need to stretch your finances is when you plan on investing in another property. The idea of putting money into real estate is enticing, but it still entails hefty capital.
If you find yourself in this dilemma, borrowing money is inevitable. You’ll need a bit of a financial boost to help tide you over until you’ve managed to sell your current home and recover financially.
Fortunately, there’s a specific type of loan that you can take advantage of for this situation. Bridge loans are short-term loans that provide sufficient funds for you to cover the selling price of a second house. The primary benefit of applying for this is that it gives you time to sell your existing property regardless if you’re still paying your mortgage.
There are a lot of bridging finance companies in the market today. They offer competitive rates and borrower-friendly terms.
If you’re thinking about applying for a bridging loan, here are some things that you should consider:
As with any other loan, you need to think about the total cost of borrowing money. Aside from the principal, you have to take interest rates and other fees into account. More than helping you identify the lender that gives you more bang for your buck, it’s an excellent way of determining whether applying for the loan is ideal for your situation or not.
Typically, you can borrow as much as 80% of your home’s value with a bridge loan. The interest rate for this arrangement is higher than its average counterparts, though, because of its short-term nature. Lenders won’t have the usual period of earning from the money that they let you borrow.
You also have to consider the options you have. There are different subtypes of bridge loans. You should be aware of these setups to find the right one for you.
These are the two main options you have for bridge financing:
- Maintaining Two Loans – In this scenario, you’ll need to find the difference between your current mortgage balance and up to 80% of your property’s value. The funds you get are then deducted from the down payment of your second home. You get to keep the first equity intact and stretch the time you have to pay off your loan when you finally sell your current house.
- Consolidating Your Mortgages – Meanwhile, you can also roll both mortgages into one. It still allows you to borrow as much as 80% of your home’s value. Here, you can pay off the pending amount on your first mortgage and apply the rest to the down payment of your second home.
The biggest risk that you have when you apply for a bridge loan is the possibility of being unable to fulfill your financial obligations to the lender. This short-term loan is usually set for up to one year.
Repaying your debt early can save you a lot of money on interest and other fees. Conversely, if you can’t repay it within the agreed period, the lender can impose a penalty.
That’s why you need to know the repayment options available. This way, you can be confident in being able to eliminate your debt.
Generally, bridge loans are repaid through:
- Property Sale – If you have prospects and are close to completing the sale of your current home, this type of financing can help tide you over until the ink has settled on the transfer of ownership.
- Refinancing – Another option is to refinance your loan into a more long-term arrangement.
- Pending Receivables – Aside from expecting funds from the sale of your current home, you may also have other receivables that you can use to pay your debt.
The process and requirements for bridge loans are different from that of mortgage applications. Nonetheless, your credit score, debt-to-income ratio, credit history, and loan-to-value rating are still vital in the approval of your request. To qualify, you’ll also need to have substantial equity on your current home.
These days, investing in real estate is lucrative. If you’re interested in buying another property yet don’t have enough funds for its purchase, you may want to look into applying for a bridge loan. Remember to consider the total cost of the loan, the type of bridge financing, the repayment options, and your eligibility.