A Guide to Bridge Loans

Many homeowners like to be able to sell their old homes and make a purchase of a new one all on the same day. Though this option seems more straightforward, it can be pretty stressful and may even pose a risk to your home. Usually this can put a lot of stress on all of the people involved. The current owner still has to be able to vacate the old house and get all of his old stuff into a moving truck and take those into the new home and seal the deal. All of that in a single day! There are even times when the one who purchased the old house will arrive at the place only to find that the area has not been fully cleaned out yet. The seller and previous owner is still trying to pack stuff up. There are sellers that believe they have a limit of until midnight to get out. However, this can easily be avoided.

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If you are looking to be able to sell your old home and buy a new one, a bridge loan may be the option for you. A bridge loan only goes for a short term and through this loan you can get temporary funding based on the current home’s equity. With the bridge loan, you can get money to pay for the down payment so that you can be able to close the deal for the purchase of the new home even if your old home has not been sold yet.

Let’s take an example to get a better understanding of a bridge loan and bridge financing. Imagine that you have sold your old home for five-hundred thousand dollars and the set closing date is 1st of December. Right now you still have a mortgage of 250k which would also be the amount of your equity. You then buy a new home for 700k. You then choose a date of Nov 15 for the purchase. This will allow you to have time between November 15 and Dec 1 to prepare the new home for moving in and getting the old home cleaned out.

You then get an approval from the bank of a 525k mortgage. To make a close you will need 175k along with the cost of moving in and renovating. Maybe you want to borrow 225k and remember you still have 250k equity.

Now here is how it would work. You would get a bridge loan amount of 225k which is 25k less than the equity you have. Take note that banks don’t usually give a loan of more than 90% of the equity. Also understand the interest rate can also vary, but you can usually expect it to be around two percent. There is also a bank administration fee which may also vary but usually a quarter of the interest. This amount may also be negotiated provided you have a good relationship with the bank.

So basically that is what a bridge loan is in terms of using it for real estate.

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