A bridging loan is a short-term loan that you can get for buying a house before selling your existing property. This loan establishes a bridge between sale price of a new property and the new mortgage that has been taken on it. The objective of a bridging loan is to offer the necessary fund for a smoothly process of a home purchase.
Even though, it can be expensive to take such loan, but at the end it will save you a lot of money. The term of the bridging loan varies from twelve to thirty-six months. This loan, tied to the equity of the existing property, comes with a high interest rate.
A typical situation explains how a bridging loan works. You took a loan to buy a new property while waiting for someone to buy your old one. However, your loan is not enough for the new purchase; a bridging loan will cover the gap. Usually, consumers use the bridging loan as a down payment for the new loan. Once you sell your old property, you can use the money to pay back the bridging loan.
This loan is not for anyone. The consumers who need it are most of the time landlords and property developers. However, since the recent financial crisis forced financial crisis forced financial institutions and banks to refuse large home loans, the bridging loan became popular among wealthy consumers who need an easy loan on residential property. This loan is particularly useful to consumers who want to sell quickly their property and buy a new one at an auction.
A bridging loan comes with some advantages. You do not have to start the repayment process as soon as you took the loan. You can wait two months before to begin the process. The bridging loan requires no qualification from consumers. The loan processing is very quick and this is a considerable advantage since time is a critical factor when concluding a deal on new house. If it suits you, you can request to cover the bridging loan into a regular mortgage later. This way, you will suppress the need to find another lender in order to get a mortgage for the new property.
However, there are also some disadvantages with this loan and it is important to know them. A bridging loan can cost more than a home equity loan. It can be difficult for you to make two payments of mortgage simultaneously, plus interest. You need to qualify for owning two properties simultaneously in order to get a bridging loan. This loan may be expensive because it includes appraisal, title policy, recording, loan origination, costs for escrow, and administrative costs.