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How does a bridge loan work in real estate?

On Behalf of | May 17, 2022 | Real Estate |

Sometimes timing does not work out when you are trying to buy a house. You might have a current home that you had hoped to sell before trying to bid on a new home. You probably need the proceeds from the sale of your old home to help you make a down payment for your new residence.

Your problem is that you cannot wait for your old home to close before placing a down payment. Taking out a traditional loan might take too long or is otherwise not feasible. This is a situation where you may turn to a bridge loan.

A look at bridge loans

Forbes explains that a bridge loan is a kind of financing that lets you borrow money for a short period of time, typically for a year. A lender will let you use collateral to secure the loan, perhaps your current home, though you may substitute other assets to secure your loan. The application and approval process for bridge financing is often quicker than other loans, so this kind of loan may help when you need it fast.

The risks of a bridge loan

Committing to bridge financing is not free of downsides. A bridge loan often has higher interest rates than traditional loans. You could also run into trouble if you do not sell your current home or property in a short period of time. You will still be on the hook for further mortgage payments as well as your current payments on your bridge loan.

Parties that may benefit from a bridge loan

A bridge loan is not ideal for all real estate buyers, but it may serve specific buyers well. You might have your house up for sale in a hot market, so there is not much doubt that someone will buy your home soon. You may already have a buyer for your home but the timing has worked out so that you will close on your new residence before you close on your current one.

Business owners can also benefit. A bridge loan may allow a buyer to move in and secure new property under a favorable deal. Bridge financing also helps entrepreneurs pay for inventory and operating costs while a longer-term financing deal is pending. Whether you are a business owner or just someone who wants a new home, a bridge loan may be a favorable option for you in some circumstances.


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