How are Bridge Loans Structured & What Are They Used For

Buying a new home before you sell your current one can be a bit tricky, especially if you do not have the funds for it. Buyers typically take out a bridge loan so they can buy another home before they sell their existing residence. If you have equity in the home you’re selling, a bridge loan could make it easier to buy a new house. The application process for this type of short-term financing can be faster than for other types of loans, but bridge loans have higher interest rates and come with risks.

A bridge loan, offered by a select few banks and private money lenders is typically for a period of six months but can often be extended up to a full year.  Bridge loans can be structured in different ways depending on the borrower’s needs. The interest rate is usually 2% or more above the average fixed-rate product, but it can vary widely along with terms and fees. A borrower with good credit standing may be able to secure better rates and terms by getting both the bridge loan and the long-term mortgage from the same lender.

Major Benefits of Using a Bridge Loan 

  1. Faster approval – the application process and closing on a bridge loan is typically faster than other types of loans.
  2. Purchasing flexibility – an approved bridge loan can give you the funds you need to close on a new home before you sell your current one.
  3. Remove contingencies from your offer – sellers may look more favorably on purchase offers that aren’t contingent upon the sale of another home.
  4. Less stress – you can use a bridge loan to help buy a new house before selling an existing home.

The cons of a bridge loan

The biggest risk of a bridge loan is that if you are unable to sell your existing home by the time you need to begin repaying your bridge loan, you’re still responsible for the installments. Unless your old home is sold, you’ll essentially be paying three loans: the two mortgages on the houses and also the bridge loan.

How You Can Use a Bridge Loan to Buy an Investment Property 

There are two common ways of utilizing the loan. One option is for the loan to be large enough to pay off the mortgage on the old home and also be used for a down payment on the new home. Another option is to use the loan only for a down payment on the new home. Often, the collateral for the loan will be the home that is up for sale.  Irrespective of the option that you choose, when the home is sold, most borrowers use the proceeds to pay off the bridge loan.

A bridge loan may seem attractive, but you should weigh the pros and cons carefully. Before you apply for a bridge loan, you might want to consider other loan options. The hard money lenders in Los Angeles will be the right specialists for you to seek advice from.