Bridge Loans: Are They A Good Way To Get From One Loan To Another?
A Few Facts about Bridge Loans
Bridge loans are an unconventional form of financing that can be obtained if a property needs to be secured quickly, such as in the event of a fire sale or to prevent a foreclosure. They are temporarily available in lieu of permanent financing, which may be delayed for months or even longer. Ultimately, bridge loans should be paid off by either the sale of the mortgaged property or through refinancing with a conventional loan. But are they a good idea?
Because bridge loans make it easier for you to purchase a new property quickly, they seem like a tempting option if you want to purchase a particular home while still trying to sell your current one. (Especially when real estate markets experience a down swing and you find yourself wanting to purchase a property that at a good price).
Calculate The Bottom Line
As with other unconventional forms of financing, however, bridge loans come with a hefty price tag compared to traditional mortgage financing. Consider this: are you prepared to potentially spend two or three times the going interest rate, and amortize 2-4 points of interest across a maximum of three years?
Also, will your loan-to-value (LTV) ratio be less than 80%? Most regular lending institutions do not offer bridge loans because of the risk involved, so financing for bridge loans is usually provided by pools of investors that specialize in high-risk investments; hence the high interest rate and points associated with this type of loan.
That is not to say that bridge loans are never worthwhile. If you are convinced you'll have a quick sale on your current property, but are worried that your dream property will sell in the meantime, then you might want to consider pursuing bridge loans as an option. But be VERY careful...
Calculate all of the possibilities, though; the amount you save by purchasing a property cheaply may be partially, if not entirely, offset by the amount you will spend financing it with a bridge loan.