Bridge loans can be important to consider when it comes to temporary financing. In this guide, we'll explore bridge loans, addressing key questions that prospective borrowers often encounter.
What is a Bridge Loan?
A bridge loan is a short-term loan that bridges the financial gap between buying a new property and selling an existing one. The bridge loan is used in place of your down payment while you wait for your current home to sell.
Example scenario: I bought a house for $100,000, closing on April 1st, but my house doesn't sell until April 14th. I need $20,000 for the down payment and I will be taking out a $80,000 mortgage. My down payment money will be coming from my house sale. My house was sold for $100,000, and I only have a $20,000 mortgage on the house. Therefore, I have $80,000 in equity.
The bridge loan will work as follows:
Purchase price = $100,000
New mortgage = $80,000
Down payment = $20,000
A Bridge Loan will cover the down payment until my house sells. Therefore = $20,000.
Since there is more than $20k in equity in my home, the bridge loan is possible. Once my home is sold, the bridge loan will be paid out.
To get an idea of what your bridge loan will cost, feel free to download our bridge loan calculator below. This calculator is one of many calculators in our Mortgage Mastery Kit, which you can also access below.
Should I Get a Bridge Loan or Use a HELOC?
Bridge Loan: Ideal for those planning to buy a new home before selling their current one. It provides quick access to funds based on the equity in your existing property.
HELOC: Suited for those with substantial equity in their current home. It operates like a revolving credit line, allowing you to borrow against your home's equity as needed.
Are There Any Other Options Than a Bridge Loan?
Several alternatives exist for those seeking short-term financing solutions:
Home Equity Loan: Similar to a bridge loan, it allows you to borrow against your home's equity. However, it's a lump sum payment with a fixed interest rate, providing a structured repayment plan.
Personal Loans: For smaller bridge financing needs, a personal loan might be an option. Keep in mind that interest rates may be higher compared to other options.
Seller Financing: In some cases, the seller of the property you're purchasing may offer financing. This arrangement eliminates the need for a traditional lender, but terms vary. This option is more common in the US and not a standard practice in Canada.
Contingency Sale: If possible, consider making your purchase contingent on selling your existing home. While this approach requires negotiation, it eliminates the need for short-term financing altogether. In a balanced market, this can be a great option so you can avoid the bridge loan altogether and any fees associated with bridge loans.
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Where Do I Get a Bridge Loan?
Securing a bridge loan involves understanding your options and approaching reputable lenders and mortgage brokers. Consider the following steps:
Traditional Banks and Credit Unions: Established financial institutions often offer bridge loans. Schedule appointments to discuss terms, interest rates, and repayment plans. Generally, these lenders will only provide the bridge loan financing if they are also providing the new mortgage for your home purchase.
Private Lenders: Private lenders and alternative financing sources may provide more flexibility, albeit often at higher interest rates. Research and compare offerings to find a reputable lender. Private lenders should be more of a last resort than your first choice because they may have higher fees than other options.
Mortgage Brokers: Mortgage brokers act as intermediaries, connecting borrowers with potential lenders. They can streamline the process and help you find the most suitable terms. Most mortgage brokers have access to the banks, credit unions and private lenders necessary for the bridge loan. However, they will likely charge a fee if you don't end up getting financing through them or through an A lender.
Online Lending Platforms: Explore online lending platforms that specialize in short-term financing. These platforms often provide a user-friendly application process. Be careful with these platforms because, most of the time, they don't provide proper advice. They can be easy to use, but you don't want to end up in a situation 1 day before closing, and they didn't give you the proper amount.
Real Estate Investment Groups: In some cases, real estate investment groups may offer bridge financing. Explore local groups and inquire about their lending programs. This is generally for larger purchases and commercial financing. Residential transactions don't normally catch the eye of investment groups.
What Does A Bridge Loan Cost?
Bridge loans are generally charged by the number of days you will have the loan. Most lenders will charge a fixed interest amount, such as prime + x% or x% per day.
Example: I need a $100,000 bridge loan for 10 days. The bridge loan will cost me 10% per annum.
Calculation = (10% X $100,000 / 365 days) = $27.39/day x 10 days = $273.97 total cost
Know Your Bridge Loan Options
In real estate transactions, the choice between a bridge loan and alternative financing options requires careful consideration. Assess your specific needs, weigh the pros and cons, and explore respected lenders to find a solution aligned with your financial goals. Whether you opt for a bridge loan, HELOC, or another financing avenue, informed decision-making is key to a seamless real estate transaction.
TL;DR
Bridge Loan Basics: A bridge loan serves as a financial pit stop, providing the necessary fuel to smoothly transition between selling your current home and purchasing a new one.
Alternative Considerations: Explore alternatives like Home Equity Lines of Credit (HELOCs), home equity loans, personal loans, seller financing, or making your purchase contingent on selling your current home to find the right financial fit for your real estate journey.
Navigating Procurement: Seek bridge loans from traditional banks, private lenders, mortgage brokers, online platforms, or even real estate investment groups, ensuring you secure short-term financing from reputable sources.
Questions/Comments?
Give us a shout in the comment section or find our contact details on the main page of our website at www.triedandtruemortgages.ca
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