As the name suggests, bridge loans provide a short-term loan, or “bridge,” that enables borrowers to use the equity in their current home as collateral to acquire additional real estate. Borrowers trying to buy and sell a home at the same time should seriously look into getting a bridge loan.
The Implications
Bridge loans, also known as “wrap” or “gap financing,” save the day for home buyers who want to move before they sell their current place. It can be easier to qualify for the loan amount of that new home while still being saddled with the monthly payments on the mortgage loan on your current home if you have substantial income and wads of cash for the down payment.
Lenders know that borrowers will likely sell their current home and recoup their investment in the new one, so even though they may be hesitant to approve a loan for the new place, they know that the borrowers will eventually be in a position to make their loan payments. A bridge loan is a short-term loan used to bridge an interim financial gap.
What You Need To Know About Bridge Loans
A typical bridge loan will allow you to finance up to 80% of the total of the two properties. A maximum of $400,000 in borrowing would be allowed in this scenario, with the sale of one home covering the costs of the other (say, $200,000) and the purchase of the second (say, $300,000). To cover the difference (say, $100,000), you’ll need a sizable down payment, equity in your current home, or both. After selling your current home, you can pay off the bridge loan and refinance into a new, longer-term mortgage at a lower bridging loan rate.
Bridge loans are short-term financial solutions that can be processed in weeks rather than months, like a traditional loan (often three months to a year). Lenders typically charge borrowers a higher interest rate and fees than they would for a standard home loan because they can’t make as much money off of interest in such a short loan term.
The interest rates on bridging loans range from 6% to 16%. For however long you’ll need bridge financing, you could look for a lender who will provide a loan with a fixed interest rate on the interest alone.
Due to the high cost of a bridging loan Singapore, it is recommended that you liquidate your current real estate holdings as soon as possible after closing on your new property. However, reading the fine print is important because some lenders have prepayment penalties and others don’t.
Consider the high origination fees your lender may charge you for a bridge loan to be the cost of doing business with them. Remember to look through the pros and cons of bridging loans before deciding to commit.