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5 Quick Facts About Bridge Loans

11/17/2010

If you’re a first time home buyer, you’ll have to purchase your home entirely with cash on hand, loans, or other liquid financial reserves.  This can make a home purchase difficult, but at least your funding isn’t locked up in an illiquid asset such as a house, as is often the case when current a homeowner wants to purchase a new home.

If this is your situation, you may find it difficult to purchase a home until your previous home has sold.  This can take a long time in today’s housing market.  If you’ve found your dream home and want to purchase it as soon as possible, consider taking out a bridge loan to help pay for the new home before your old home has sold.

Many homeowners aren’t aware that bridge loans are an option.  The following facts will help you understand more about what bridge loans do and how they work.

1.    Bridge loans are short-term loans.  A bridge loan is not a mortgage, though it acts like a mortgage in many ways.

2.    A bridge loan pays off the mortgage on the current home first and includes an extra lump sum amount that is used to make the down payment on the new home.  The borrower is then free to move into the new home and wait for the old home to sell.

3.    Bridge loans are typically paid off all at once, when the old house sells and the owner recoups the necessary money.  Most of the time, borrowers are not required to make monthly payments on bridge loans.

4.    Interest rates on bridge loans are not as low as the best mortgage rates because bridge loans are not mortgages.  Bridge loans may be secured or unsecured, but secured bridge loans often require that the borrower take out his or her new mortgage with the same lender.  As always, your credit score is a major factor in determining your interest rate.

5.    Bridge loans come with significant closing costs.  Be sure to factor this into your calculations to determine if a bridge loan is right for you.

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