What is a Bridge Loan?
A bridge loan is a type of short-term loan used to help bridge the gap between purchasing a new property and selling an existing one. In many situations, homeowners may need quick access to funds to cover the cost of buying a new home before their current one sells. While bridge loans offer a quick way to obtain financing, they have short repayment periods and high interest rates, so they can become quite expensive. This post will compare alternative forms of real estate financing that can be used to make ends meet in a pinch.
A home equity loan is secured using your current home as collateral, where you can borrow against the equity you have in the property. Home equity loans often have longer repayment terms than bridge loans, ranging up to 20 years, with interest rates that are more favorable. However, obtaining a home equity loan still requires you to carry multiple mortgages, which can be a drawback. Should you buy a new home but are unable to sell your old house fast enough, odds are you'll be stuck with two mortgages (or potentially even more).
A home equity line of credit (HELOC) is similar to a second mortgage while granting a better interest rate and lower closing costs. It also includes added time to repay the borrowed funds. This alternative allows you to use the funds borrowed to make home improvements and other upgrades as well. Some HELOCs may come with prepayment fees attached, so be careful of that.
An 80-10-10 loan is a type of financing option that allows buyers to purchase a new home with less than 20% down payment while also avoiding additional private mortgage insurance (PMI) fees. It works by paying 10% down and obtaining two mortgages: one for 80% of the new home’s asking price and the other for the remaining 10%. After selling your current home, any funds left over can be used to pay off the second 10% mortgage on the new property.
Personal loans are another option for obtaining financing quickly. It is an unsecured loan, where the lender does not require collateral, unlike home equity loans. Good credit history, stable employment, a consistent record of paying bills on time, and a reasonable debt-to-income ratio are required for you to qualify for a personal loan.
Planning a timeline to move homes can be really stressful. It's unlikely that your home will sell on the exact day that you purchase a new one. It's recommended that you connect with a financial advisor or a mortgage professional to help determine how you should manage that overlap. Alongside the options described in this article, an industry expert is better equipped to advise you based on your unique situation and financial needs.
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