Bridge money loan might appear to you to be very thrilling and enticing given its awesome and mouthwatering packages that you will get carried away with the thoughts of its importance, especially as you can buy a new home before selling the current one, thus putting you miles above financial conundrums. Bridge loans New Jersey popularity could be an eye-opener to this claim. Nevertheless, a thorough understanding of bridge loan and how it works is really important to avert the financial woes that may arise as a result of its use.
Normally, you have to come up with cash for a new property when you do not have access to the home equity you have already built in your current property. This is where bridge loans come in for salvage. They fill that financial gap between your current home and the one you wish to purchase by providing a temporary financing option through a short term lending. This is why they are referred to as a ‘bridge loan’.
As an individual or real estate investors wishing to apply for or use a bridge loan to secure a new house or to perform construction activities, renovations and flipping, you must be aware that your current house is directly or indirectly the loan collateral. The period the loan is expected to serve you must be put in consideration too. Bridge loans are short term and temporary financing option. This means that they last up to a period of 6 and 12 months. You must also be aware of the fact that interest rates on bridge loans could be higher than those of conventional lenders and traditional mortgages. More so, you MUST provide an equity in your current home to qualify for the loan. The equity is usually at least 20 percent.
Further, bridge loans repayment could take several tolls and ways. Sometimes, lenders may request that you start making the payment right away or you may be allowed moratorium of several months in other instances. Moratorium as related to loans and finances are referred to as a period of short rests before borrowers are compelled by lenders to begin the repayment of a loan plan. In either of the two instances, be sure to read the loan terms and conditions clearly so that you will have a thorough understanding of when your financial obligations begin as well as end.
Bridge loans can be a very successful real estate financing option because of the many benefits they promise. They can give you an edge in a competitive market, and in the same vein they could be a more convenient option than their alternatives, even the conventional ones. With a bridge loan, you can make offers for a new home without a sales contingency to improve your chances of securing a deal, you can borrow a bridge loan when you are set to avoid private mortgage insurance (PMI), when you are building a new home or when you need cash for a down payment without accessing your home equity right away.
All of these importance doesn’t mean that the bridge loans doesn’t come with its share of risks. In fact, they could sometimes cost more than alternatives. According to many professionals, the biggest downside a bridge loan possess is its price tag. Because they are short term loans, borrowers have very short timeline to turn it into profit. Owing to this, higher percentage points are usually charged than what you would pay with home equity loans. Their closing cost may be very expensive too, and they usually differ from loan to loans. You might also be at the risk of taking on more debts. What do I mean? You are simply borrowing more money. The loan is already secured by your home, so you have another mortgage. If you fail to pay the loan as and when due, you could face late fees and financial turmoil.
Most importantly, if you cannot predict when you would be selling your home, taking a bridge loan might not be so advisable. You could be in a big mess to meet your financial obligations, in which case, falling behind payment schedule could lead to foreclosure on your old home, the new property or both.
Bridge loans can be risky as much as they are useful.