A bridge loan is short term interim
financing on a purchase money transaction. The bridge loan essentially “bridges
the gap” between the time their old property is sold, and
new property is purchased. When a seller won’t accept the
buyer’s contingency, a bridge loan might be the next best
way to finance the new home.
Bridge loans are typically more expensive than conventional
financing to compensate for the additional risk of the loan.
Bridge loans typically have a higher interest rate, points and
other costs that are amortized over a shorter period, and various
fees. The lender also may require cross-collateralization and
a lower loan-to-value ratio.
Many purchase contracts have contingencies which allow the buyer
to only agree to the terms if certain actions occur. For example,
a buyer may not have to go through the purchase of the new home
they are in contract for unless they sell their old home first.
This gives the buyer protection in the case that no one buys
their home, or if nobody is willing to buy the property at the
terms they desire.
A bridge loan is normally structured as a second loan on top
of the existing liens. Normally you make either interest only
payments or there is a balloon due at the end with the interest
included that has accrued over the time the loan has been held
on the property. And once your old house sells, you’ll
use the proceeds to pay off the bridge loan and all the associated
interest and remaining balance. Depending on the loan these are
6 0r 12 month loans and fixed rate.
Cross-collateralization is a term used when the collateral for
one loan is also used as collateral for another loan.
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