Real estate transactions often use bridge loans to provide cash flow during a transitional period, like moving from a current residence to a new home. Homeowners can use short-term loans like this to finance a new home or even to pay off an ongoing debt. New Jersey bridge loans can be handy if you need some quick cash. But just like any form of financing, there are pros and cons to bridge financing. This article will help you understand what bridge loans are and how they work.
Defining Bridge Loans
Bridge loans are a type of short-term financing that serves as a source of funding and capital until a person or business is able to secure permanent financing or pays off an existing debt.
Also known as swing loans, bridge loans are usually short-term in nature. In general, they can go anywhere from 6 months up to a year. They are often used in real estate transactions, especially when financing the purchase of a new home prior to selling an existing residence.
How Does a Bridge Loan Work?
New Jersey bridge loans are usually used by sellers who find themselves in a difficult situation or when the need to make a sudden change of residence. The terms and conditions of bridge loans, however, can vary greatly between lenders and individual transactions.
Many of these financing methods are meant to help you pay off your first mortgage at the same tie that your bridge loan closes. Others, however, add and pile new debt on the total overall amounts you owe. Costs also vary greatly between lenders, and bridge loans can have a different payment structure. For instance, some lenders might require you to make monthly payments, while others may have a set rule, and require a mix of upfront and/or lump sum or end-term payments.
Some reasons to opt for a residential bridge loan are as follows:
- If you’re unable to afford a down payment without having to sell your current house first
- A serious need to secure a new home immediately
- The closing date for a new purchase is after the closing date for the sale of your home
- You want to secure a new property before you list your current home
- Sellers in the area you’re interested in aren’t comfortable with contingent purchase offers.
In general, there are two major options you can take if you are seeking out a bridge loan, and they are:
- Using the bridge loan as a second mortgage to put toward the down payment for their new home until their current home is sold.
- To take out a huge loan to pay off the mortgage on their hold home and use the rest of the money borrowed to the down payment of their new home.
Bridge loans are also:
- Run for at least 6 months or a year long
- Secured using the borrower’s current home as the collateral
- Only issued by lenders whom you agree to finance your new mortgage
- Different with regards to interest charged, with charges usually hanging slightly higher than the prime rate
Keep in mind that applying for New Jersey bridge loans is similar to applying for a regular mortgage. Your loan officer will look into a number of things when considering applications, such as your credit history, credit score, and debt-to-income ratio (DTI). In addition, most of the institutions that offer bridge loans allow applicants to borrow up to 80% of their loan-to-value ratio (LTV).
This means that you’ll need at least 20% of equity in your current home to qualify for a bridge loan package, and to satisfy other financial qualifications.
Pros and Cons of Bridge Loans
Like all other forms of lending and financing, there are pros and cons associated with taking out bridge loans as well. Let’s take a look at the upsides and downsides associated with this type of lending option.
- It gives you an opportunity to purchase a new house even before you’ve sold your current home.
- You can make put up an offer on a new home even without implementing a sale contingency.
- Gives you additional funds in case of an unexpected or sudden transition.
- It provides a short-term solution for solution when you need financing during periods of uncertainty.
- There are usually no monthly payments for the first couple of months.
- There’s a chance to avail of interest-only payments
- Bridge loans have higher interest rates and APR.
- Lenders usually require homeowners to have a minimum of 20% home equity established before they offer a bridge loan.
- Most lenders will only offer bridge loans if you also use them to pay your new mortgage.
- It’s possible to own two houses at the same time—and it can be quite stressful to manage two mortgages at the same time.
- If you have trouble selling off your property, you can end up with issues in the future, or worse, a foreclosure.
You can obtain New Jersey bridge loans from many lenders such as credit unions, banks, and other financial institutions. But your current mortgage provider is the most common originating source for such loans. If you’re thinking of getting a bridge loan, your first line of defense.
Tip: As you go forward looking for a finance partner, try to avoid lenders that offer quick access to capital. These lenders may end up charging you with huge rates for their services but have a bad track record in performance or customer service.
A bridge loan can be very useful in some situations, especially if you ever find yourself in dire need of purchasing a new home even before your current one has been sold. But even though bridge loans can help you when you’re in trouble, it can also have some serious setbacks. For example, it could result to a costly acquisition.
Getting a bridge loan will certainly help you have more cash to spend on available real estate. But you’ll also end up adding to your overall debt load, and you might have to pay off multiple loans at the same time if your current home doesn’t get sold immediately. The best strategy is to wait until your old house is sold before you go ahead and purchase new property.