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Sometimes, when you need to purchase a home and sell your previous one, the need for finance becomes clear. Since the purchase and the sell occur in a short time span, bride loans come to ease the transitioning eliminating the necessity to have an amount in cash to pay for deposits and expenses or even to repay a whole mortgage.
Have you ever thought that a loan can bridge a gap? Yes it can, and it is called a Bridging loan. It acts as a bridge between two financial transactions. If you notice, a lot of people rely on the sale of their old property before they purchase new one because they collect the cash from the sale of their existing property and pay the deposit on new property. This is because the lender who provides them a loan is not willing to release the funds to purchase the new property until the existing mortgage is repaid because he feels the borrower won’t be able to financially support two mortgages together. Here, a bridging loan is viewed as a temporary loan until your existing property is finally sold.
How Does It Work?
The question of Bridging loans arises when you need to pay for the new purchase even before selling your earlier property. It has two patterns of payment. One, if your lender is permitting you to run two mortgages together (for a smaller sum) just to pay for the deposit on the new property. The second is for a larger amount, a figure that will repay your existing mortgage, and pay for the deposit on the new property as well.
When a lender pays you a certain amount as a bridging loan, both of you view it as a temporary loan until your existing property is finally sold. So the lender expects you to repay it as sale proceeds within 6-12 months. Sometimes lender may add interest that you accumulate during this waiting period to the balance you have borrowed. Here you are not required to pay the loan during this time and can repay the original balance and the interest in one go once your property is sold.
When Is It Convenient?
A bridge loan works in various situations. For example, if you want to buy a house and plan to shift to the new house before you sell your current one. Here you may want to consider a bridge loan to span the gap between the two transactions. You can obtain the loan from the lender who is financing your new home.
Bridge loan is exciting because it is planned for a shorter span of time (one year) and allows hefty prepaid interest (of six month's worth). Also a bridge loan can be used to pay off existing mortgages with the remainder going towards the down payment on the new home. So even if after six months you are unable to sell your property, you begin to make interest on loan payments. And finally when you sell it, the bridge loan is paid off. If it sells within the first six months, any unearned interest payments will be credited to you.
Competitive Loan Terms
The terms of a bridge loan varies depending upon the lender. You must be sure about the exact reason for opting for bridge loan. If you have opted due to time problems in moving, you must let your banker know in advance. A bridge loan can have different forms, it can structured, where you will have to completely pay off the old home's first mortgage, but in other cases the lender might pile up the new debt on top of the old one. A bridge loan is usually based on the amount of equity in the borrower’s current home with the proceeds going towards the purchase of a new home.
In case you want to escape the idea of two mortgages at the same time, what you can do is start finding a buyer for your old property in advance of purchasing new property. Still if you can’t avoid such a situation then you must go for a bridge loan. You can ask the banker to help you make the double payments.
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