If you have control of your financial life, then you must have heard of a bridge loan. And if not, learning about it might help you solve your financial woes. It is a loan for a short period to cover our expenses until our major finance comes in. In other words, until our capital loan gets sanctioned, a bridge loan meets our day-to-day cash requirements.
Bridge loans have a repayment period of one year and carry a higher rate of interest due to higher risk and easy documentation involved. Unlike some other easy-to-obtain loans, these loans are usually against a mortgage.
Bridge Loan for a mortgage
Going a step ahead in the financial world, obtaining a bridge loan for a mortgage has become a norm for many these days. And why shouldn’t it be? It lends a sense of security. But what is the whole concept? Let’s understand.
A bridge loan is a mortgage against a property that the borrower takes to purchase a property. It covers the borrower between the time-gap of buying a new property and selling his old one. Once the old property is sold, the loan is paid off.
It is usually taken for a period of six months but can sometimes extend up to one year also. It carries a higher rate of interest than a regular loan and also has higher closing costs.
As we have got the basics clear, let’s jump a little deeper to know if you need to look for a money lender or just let it pass like only another loan.
How do bridge loans work for a mortgage?
For you to assess if this loan is right for you, it is imperative to look into how they work. If you have made up your mind to obtain a bridge loan to finance your new home, it can be done in two ways. Both the scenarios and their furtherance follows.
Obtaining to consolidate other loans
The first scenario is taking a bridge loan to pay off all the existing lien on your old property. The amount left after this will be used to buy the new property.
Now, you won’t have to make any monthly interest payments towards your bridge loan. The only fixed obligation is towards your mortgage payments on your new property.
After you can sell off your old property, you’ll pay off your bridge loan and the outstanding interest or costs, if any.
Obtaining as a second/third lien
In this scenario, you don’t pay off the previous liens on your old property but take a bridge loan against it solely to pay for the new property.
Now, you’ll have to pay for your fixed obligations towards the old lien amount attached to your old property and towards your new lien attached to your new property.
Since this new obligation can get stretched up to one year, think before taking such a huge step. If you are selling your old home during the boom period, your property has excellent chances of being sold within a month or so. So, consider all factors before taking up such a big responsibility.
Highlights of Bridge Loan
Financial advisors often criticize a bridge loan due to various facets like origination fees, high lender fees, high rate of interest, closing costs, etc., but it has benefits too. It gives a financial cushion when needed the most.
For convenience, all its positives and negatives are listed here separately.
- It helps you shift to a new home quickly when the deal on your old home still hasn’t closed. You don’t feel restricted in this scenario.
- It saves you the costs of temporary living when you are yet to receive money from your old home’s sale.
- It saves you the storage expenses of all your household items when you have in home, i.e., a situation where you have sold the old home and is yet to buy a new one.
- Bridge loans generally carry attractive offers without any hidden terms and conditions or contingencies.
- They offer you the flexibility in the payment of interest, and in case it gets delayed, you can pay the full outstanding amount along with the principal amount at the end.
- It also does not have any penalties if you exercise the prepayment option, unlike some other types of loans.
- It can be used to consolidate all the other liens on your property, thus, saving you from multiple interest payments.
- It is somewhat tough to get qualified to obtain a bridge loan. The pre-scanning procedure of your application will be tough for you to get through.
- It carries a higher rate of interest as once the loan application is approved, the loan amount is quick to show up in your account. This rate is generally at least 2% more than the average interest rate fixed by the industry.
- The closing costs on this loan are an extra burden along with other loan closing costs.
- There is always a risk of foreclosure of your property if you fail to sell your mortgaged property in the stipulated time.
- With another loan on your name, your monthly fixed obligations are more now.
- Bridge loans are usually repayable within six months, and this time prod can be extended up to a maximum of one year. This makes the repayment period short for such a significant amount. You may or may not be able to repay in such less time.
- Sometimes, to pay their bridge loan on time, one may rush to sell his old property as not to face any penalty. This may make him accept a loss too.
- It is an unnecessary mental burden in your life.
Since they have appeared on the scene, bridge loans are debatable. With all the swiftness and unambiguous terms, it can sometimes be a blessing in disguise for many of us. But such a significant risk should only be taken after weighing in all its negatives too. And then, if the pros are weighing heavier for you, don’t hesitate to take that big step with instant cash loan Singapore, but only after a healthy chart-out plan.