Home buyers who find it difficult to buy a home due to intense market competition might consider using a bridging loan to give themselves an edge.
A bridging loan allows buyers to finance their next home purchase before selling their current home. This allows them to forgo the sale of their own home in the event of an offer when they make an offer on a new property. It should help their offer stand out from the rest. during a bidding war.
Essentially, a bridging loan is a loan taken on the existing home, which can then be used to make a down payment and finance the purchase of the new home. Very often these are temporary loans that can be repaid after their current home has been sold.
Experts say that an offer that is not dependent on the sale of the current home is much more likely to be accepted than offers that are.
“There’s no denying that a bridging loan can be handy if you’re ready for a change but don’t want to risk a conditional offer,” Jordan White said in Housing. “A bridging loan can also be a good way to finance a new home, in case you need to move for a job.”
Consumers should be aware that the structure of bridging loans can differ depending on the lender. In most cases, the homeowner can use part of the bridging loan to pay off their existing mortgage and then use the rest as a down payment on the new home. Other lenders allow the bridging loan to be used as a second mortgage that also covers the down payment on the new home. Another advantage is that the underwriting process tends to be faster with bridging loans than with traditional financing.
However, there are a few drawbacks. The most important consideration is that bridging loans tend to come with higher interest rates, typically between 8.5% and 10.5%, according to HousingWire. Additionally, the term of a bridging loan is typically only six months to a year, so borrowers will have to repay the loan within that time frame whether or not they manage to sell their own home.
“Paying two mortgages and making payments on your bridge loan can be stressful, especially if your existing home isn’t selling as fast as you might expect,” White said.