Understanding Bridge Loans: A Comprehensive Guide

When navigating a real estate transaction, timing often dictates whether a deal goes through smoothly or falls apart. For many homeowners, a bridge loan can offer a viable solution to bridge the gap between buying a new property and selling an existing one. In this article, we will explore the ins and outs of bridge loans, including what they are, how they work, and when they may be a good option for you.

What is a Bridge Loan?

A bridge loan is a short-term financing option used to 'bridge' the financial gap between buying a new property and selling an existing one. These loans provide immediate cash flow, allowing buyers to move forward on a new purchase before the sale of their current property has been completed.

Typically secured by the existing home as collateral, bridge loans are designed to be paid off quickly, usually within a year, once the old property is sold.

How Bridge Loans Work

Securing a bridge loan is generally straightforward but it's important to understand its terms. Once approved, borrowers receive the funds needed to move forward with the purchase of their new property. This immediate financing can be crucial in competitive markets where buyers must act quickly to secure the home of their choice.

These types of loans are short-term solutions and are typically six months to a year. Most lenders require 20% equity in the current property and often come with higher interest rates than traditional mortgages. This is because bridge loans are considered higher-risk, as they rely on the sale of the existing property to pay off the loan. The goal is to pay the loan off quickly once the old property is sold, thus minimizing interest payments.

When Should You Consider Using a Bridge Loan?

There are different scenarios where a bridge loan may be a suitable option for homeowners, including:

• When you need to move quickly: Bridge loans can provide the necessary funds to act fast on a new property purchase without needing to make a contingent offer. This is particularly useful in hot real estate markets where properties are selling quickly.
• If you plan to use proceeds from the sale of your existing home to fund a new purchase, but it has not sold yet, a bridge loan can help you avoid missing out on a great opportunity.

• If you're in the process of selling your current property and need funds to make necessary repairs or updates, a bridge loan can provide the cash flow to get your home market-ready.

Pros and Cons of Bridge Loans

The Advantages of a Bridge Loan

1. Flexibility: One of the most significant benefits of bridge loans is their flexibility. They allow you to make an offer on a new property without making the sale of your current home a contingency of the offer, making your bid more attractive to sellers.
2. Speed: Bridge loans can be processed quickly, providing you with the necessary funds to move forward with a purchase in a timely manner.
3. Convenience: By securing a bridge loan, you can avoid the stress and logistics of having to move twice if there's a gap between selling your old home and moving into your new one.

Potential Disadvantages of Bridge Loans

1. Higher Interest Rates: Due to their short-term nature and the risk involved for lenders, bridge loans tend to come with higher interest rates compared to traditional mortgages.
2. Locked into Lender: Many lenders will require you to utilize them for both the bridge loan and your new mortgage, which may limit your options for obtaining the best rates.
3. Risk: If you're unable to sell your old home within the timeframe of the bridge loan, you may be left with two mortgage payments, putting you at risk of defaulting on both loans.

1st Security Bank's Bridge Loan Program

At 1st Security Bank, we offer competitive bridge loan programs to help our customers acquire their dream home without the stress and hassle of having to sell or list their current property first.

Some key benefits of our Bridge program when you do a purchase loan with 1st Security Bank include:

• Simple Fee Structure: A flat fee of $1,000 covers the loan, regardless of the amount borrowed.
• Competitive Interest Rates: Interest rates are fixed at 1% above the prime rate, with interest-only payments over a 12-month term.
• Enhanced Borrowing Limits: The loan offers substantial loan and combined loan amounts of up to $766,500 and $1,766,500 in conforming counties. In high-balance counties limits increase to $977,000 and $1,977,000.
• Rent Offset: Portfolio programs allow documented market rents to offset the current home payment(s) to help qualify.
• Simultaneous Closings: Both your new purchase and the bridge loan can be closed on the same day for added convenience.

Bridge loans can be a valuable tool for homeowners in certain situations, but they are not without their risks. It's crucial to weigh the pros and cons and carefully consider your financial situation before deciding if a bridge loan is the right option for you.

For more details on how 1st Security Bank's bridge loan can facilitate your property purchase, contact one of our experienced home loan officers directly. We offer no-obligation consultations and pre-approvals.