Did you know that U.S. mortgage debt balances jumped from $9.56 trillion in 2020 to $10.29 trillion in 2021?
Those figures prove that home ownership is still crucial for many Americans. Yet, despite that, many still can’t afford a new house. Especially not after home prices went up by nearly 19% in 2021.
If you’re a bit short with your home buying budget yourself, worry not, as bridge loans may help.
So, what exactly is a bridge loan, and what are its pros and cons?
This guide answers all those questions, so read on.
What Are Bridge Loans?
Bridge loans are short-term financing programs often backed by collateral, such as homes. They provide funding until borrowers can secure a permanent or longer-term loan.
Most borrowers who apply for bridge loans use them as real estate loans. However, they’re not mortgages; they only supplement the buying power of a borrower. In short, they provide you with more funds on top of what you already have to buy a new house.
What Are Their Benefits?
You can use a bridge loan to help fund a single-family housing purchase. Likewise, you can take one out to invest in multi-family properties. Moreover, according to this company, you can close in as short as seven days after appraisal.
That quick closing time is due to a bridge loan using a property as collateral. Thus, lenders are more likely to finance the purchase since security backs up the loan.
A bridge loan also provides you a chance to purchase a new house before you can sell your existing one. Doing so helps you “bridge” the gap between now and when you get the money from selling your current home.
A bridge loan can also fill the gap between the sales price of your existing house and the one you want to buy.
Note that homes in the U.S. now sell, on average, for more than half a million dollars. However, your current home’s price may be lower than what you want to purchase. In that case, getting a loan from a bridge lender can help you offset that difference.
How About Potential Drawbacks?
A bridge loan’s interest rate can start at 8.5%. Depending on your creditworthiness and qualifications, though, that can jump higher.
That makes bridge loans some of the more expensive loans for real estate purchases. That’s especially true if you compare them with traditional 30-year fixed-rate mortgages. Such loan options typically come with rates ranging from a little over 4% to under 6%.
Another potential drawback is that a bridge lender may require equity of no less than 20%. So, you need to own at least 20% of the home you’re using as collateral. Otherwise, you may not qualify for a bridge loan.
Start Exploring Bridge Loan Offers Today
As you can see, bridge loans can help you secure short-term financing for a new home you want to buy.
However, keep in mind that a bridge loan has a higher interest rate. Moreover, you may have to pay it back after one to three years. But if you’re okay with that, consider exploring your options ASAP.
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