From Here to There: Everything You Need to Know About Bridging Loans

0
757
Loans
If you have questions about bridging loans, then be sure to check out this article. Click here to discover everything you need to know about bridging loans.

You’ve been keeping an eye on the housing market for a year now, and you’ve found the perfect house.

But your current abode hasn’t sold yet, and you need the funds in order to move.

What do you do?

A bridging loan, also called a bridge loan in the US or a swing loan, may be your best option.

However, this finance option can be somewhat confusing. That’s why we’re giving you the down and dirty, free-falling lesson over bridge loans.

We have a chute, we promise.

Hang on tight, and learn everything you need to know about these confusing loans in one fell swoop. Then you can decide for yourself if this route is right for you.

What Is a Bridging Loan?

Think of these loans as a means to transfer smoothly from one house to the next, just like a bridge takes you safely from one area of land to another.

These loans are short in nature, but they can be a huge relief to homeowners ready to move but unable to do so until their current house is sold.

In a nutshell, they give you the money to move with the expectation that you’ll sell your house.

These loans typically have higher interest rates and fees than many others.

They can also be applied in the business sector.

Open-ended bridging loans are ideal for those who have not yet sold their house or are investing into something new without imminent funds to repay the initial investment.

Closed loans are used for those who have a clear repayment option in the works.

How Do They Work?

With a bridging loan, finances are released when you plan to build a property or buy a new house. Buyers then use the funds from selling their original abode to pay the loan back.

What Do I Need to Know?

Bridging finance should not be considered lightly. It comes with its own set of advantages and disadvantages, but it can also be extremely beneficial under the correct circumstances.

Advantages

For those who can obtain a loan, they may reap several benefits.

Flexibility

With bridging loans, borrowers looking to purchase a new home may not be forced to sell their old house right away. They can take their time and check to make sure they really are purchasing their dream house.

Smooth Moves

Cheap bridging loans may provide a peace of mind for those on the cusp of moving. No more worrying about paying the initial costs for the new house, and the loan will be paid off as soon as the old home sells.

Initial Payments

Many lenders do not require monthly payments right away. Again, this gives you the flexibility to get affairs in order, search for a house and begin filing paperwork.

Pay Back

Finally, there’s the logical standpoint that, as soon as you sell your house, you will have the money to pay the loan off.

Therefore, if you’re positive your home is going to sell (and soon), this can be a fantastic choice that will give you a smooth transition from old to new.

Disadvantages

It sounds great, right? But borrowers do need to keep the following in mind.

Rare

Bridging loans are difficult to find. Part of the reason for this may lie with the risk of defaults.

After all, many things can go wrong when selling a house, and in today’s market, some houses remain for sales for years without an offer.

However, they are certainly not impossible to find. You can learn more about obtaining one here.

Difficult to Obtain

In addition to being hard to find, bridging finance is also extremely hard to obtain.

You must have a fantastic credit score and low income-to-debt ratio. Pretty much, you are expected to have enough money to pay both mortgage rates for an undetermined amount of time.

Further, there cannot be any current liens on your house.

Higher Cost

Cheap bridging loans are basically non-existent. Expect much higher interest rates and upfront fees for taking out the loan than you would in other scenarios.

These rates are due to the risky nature of swing loans as well as the short duration, as many loans only have a six-month lifespan.

Many banks suggest utilizing a home equity loan instead, as they can be a cheaper and safer alternative.

Risky

Yes, it’s risky. The real estate market comes with many caveats, and a deal you were sure would work can easily fall through. In fact, this is why more and more realtors are asking for backup buyers when selling property.

You may also have two mortgage payments for a time as well as a loan that is accruing high interest. This is why banks take these loans so seriously and are strict in doling them out.

Unfortunately, these dangers have led to many homeowners suddenly losing both their current home and the one they were wishing to move into.

Should I Consider This Type of Loan?

Experts still disagree on the overall benefit of swing loans.

Generally, if these characteristics apply to you, bridging finance may be a good fit:

  • You have a great credit score
  • You can afford to pay two mortgages at once comfortably
  • You are very sure your house will sell soon
  • You are ready to purchase a new home or will be in a relatively short time frame

Avoid this financing option if the following applies:

  • You have a weak credit score
  • You cannot afford to pay two mortgages at once for a long duration
  • The housing market in your area makes you uncertain your house will sell quickly
  • You have not found a new home or you have not started looking for a new home

The Bridge to a New Home Starts Here

Weigh the pros and cons for yourself, but be sure to keep both in mind when making a decision. This type of financing can be a life rope, but it can also be the scissors cutting that rope in half.

But bridging loans shouldn’t be the only thing on your mind when purchasing a new home; there are many other factors to consider.

Are you considering moving or purchasing a house?

If so, take a look at our article about financial planning. It will give you all the ins and outs of preparing to buy so that you can start building your own bridges today.