In today’s housing market with sparse inventory, many people are opting for new builds or even to build their own custom homes. If you’re interested in building on a piece of property but unsure how to afford the cost until you sell your current home, a bridge loan might be a helpful tool.
What is a Bridge Loan?
A bridge loan is designed to “bridge the gap” of financing between mortgages. Building a home can take months and most people would prefer to stay in their current home until the new one is completed. But qualifying for two conventional mortgage payments at once can be too much for buyers. A bridge loan is a short-term loan that lasts between six months and a year to accommodate that in-between need.
What Are the Terms?
Bridge loans use your existing home as collateral. Borrowers can typically finance up to 80% of the combined value of the old and new home. Once your new home is complete, you pay off the bridge loan from the sale proceeds from your existing home. At the same time, you apply for a new mortgage for your brand-new home.
How Do I Apply?
The application for a bridge loan is very similar to a conventional mortgage application. The lender will check your credit history and score. They will also look at your income and assets and your debt-to-income ratio to qualify you. The process typically takes half the time of a traditional loan approval.
What are the Interest Rates Like?
Because bridge loans are shorter than traditional mortgages, they provide less time for the lenders to make money on interest. They are also riskier because of the large amount due after a short time period. To compensate for both factors, lenders often charge more money in interest. Interest rates on bridge loans can start at prime rates but can easily be at least 2 percentage points higher than conventional rates.
How Much Will I Pay in Closing Costs?
Closing costs on bridge loans typically run from 1%-3% of the total loan amount. They include the appraisal fee for the new property, title and escrow costs, administration and notary fees, and loan origination costs.
A bridge loan could be a smart way to stay in your current home while you wait for your new one to be built. If you'd like to know more, please give us a call today.