When you are buying a home, you have a few different options for financing. The most obvious of these is a conventional mortgage with either a fixed or variable rate. However, there are some circumstances in which this may not be the best choice or even possible. In some cases, using a bridge loan is the better option. Understanding this useful form of financing and its benefits will enable you to make well-informed decisions about buying a home in South Florida.
What Is Bridge Lending?
Bridge financing is essentially a type of loan that helps to close the gap between your current financial situation and your next loan. In other words, it is used to help secure long-term financing. It is used for real estate purchases, renovations and refinancing. Additionally, there needs to be real estate as the collateral on the loan.
Typically, in a real estate purchase, bridge financing is used to cover all or part of the costs of a new property while selling your current property. So, if you are moving primary residence, you could use bridge lending to help with the costs of the new home while you sell your current home.
These loans are typically very short and have high interest rates. However, their total cost is more contained than you may expect because of the short payoff time.
How Does Bridge Financing Work?
As mentioned, bridge financing is asset-backed. This means that it is secured against the property you currently own, almost always real estate. For residential real estate deals, this will typically be a loan secured by your home equity.
There are a few ways that it can work. You can use the loan as a way to pay off your current mortgage, allowing you to secure financing for the new property. Alternatively, you can use the loan for a down payment on the new property.
In either case, you will be used your equity in your current home to help make buying the new home possible. Typically, the bridge loan is paid in full once the original property has been sold.
How Do Bridge and Hard Money Loans Differ?
Hard money loans are very similar to bridge financing. In fact, bridge lending is often considered to be a subset of hard money lending. However, there are some key differences.
First, hard money loans are financed by private capital. In other words, they are not offered by banks or other traditional lenders. This allows them to avoid some of the restrictive requirements that banks have to follow. Bridge financing can be funded through private capital but may also be offered by a bank.
Second, hard money lending is more flexible in how you use the money. Conversely, bridge financing is used solely for real estate. Furthermore, while both are short-term loans, bridge lending is particularly intended for situations in which it can “bridge the gap.”
What Are the Benefits of Bridge Financing?
This is a valuable form of financing in many situations. These are a few of the reasons you may consider using bridge lending:
- Fast: One of the main characteristics of bridge financing is that you can secure a loan quickly. Typically, the turnaround is a couple of weeks. In some cases, it can be just a few days. This means that you can secure the financing you need substantially faster than the months needed to close a traditional mortgage.
- Avoids the Need for a Contingency Offer: When you use bridge lending to help with your purchase of a second property, you can avoid needing to make a contingent offer. In other words, the seller can be confident that your offer will be moving forward. This can put you at a significant advantage compared to people who need to sell their homes to fund their offers.
- Helps You Avoid Delays: When you use bridge financing, you can avoid the delay of needing to sell your home. If there is a time-sensitive opportunity available, you can move forward with it. In turn, this can potentially mean saving substantial amounts of money or getting the perfect home due to your fast funding.
How Can Bridge Financing Help With Buying a Home?
There are a few ways that bridge lending can help you with your next home purchase. As mentioned, you can either use the money to pay off your current home mortgage or use it to help with the purchase of your new home directly.
In the case of paying off your current mortgage, you have a few options. You can refinance your current mortgage with some additional money from your home equity (a cash-out refinance). This will allow you to pay the down payment on the mortgage for your new home. Alternatively, you can simply pay off your current mortgage and make the down payment another way. In certain circumstances, this will help you to secure a more favorable mortgage on the new home.
Alternatively, you can use bridge financing to cover the new property. Depending on your home equity situation, you can either borrow a down payment on the new home or potentially buy it outright.
No matter how you use your bridge loan, there is one major upshot: you will be able to secure financing for the new home without selling your current home. For the vast majority of homeowners, getting the down payment to buy a new home requires selling their current home. In turn, this requires a contingency offer on the new home. Since a contingency offer can fall through if you are unable to sell your home, it is less attractive to a seller.
Therefore, using a bridge loan can help you make a more competitive offer. Depending on the market, you could save some money or even just have a chance at getting your offer accepted.
What Are the Alternative Loan Options?
Of course, there are many other options beyond bridge financing that can help you with buying a new home in South Florida. These are the three major options available:
- Cash Down Payment: If you have some cash on hand, you can make a regular down payment on your new home. Traditionally, lenders have asked for 20% down. However, there are many more flexible options available. In some cases, if you make a smaller down payment, you may find yourself needing to pay for private mortgage insurance, which can increase your monthly payments.
- Home Equity Line of Credit: If you have some equity in your home, you could use a home equity line of credit to cover your down payment. A HELOC allows you to borrow against the portion of your home that you own. It functions a bit like a credit card in that you can use it for all sorts of reasons, and you have a limit that you can borrow against in whatever amount you need.
- 80-10-10 Loan: This is sort of line a hybrid between a cash down payment and bridge financing. If you want to secure a loan but don’t have 20% to put down, you could put down 10% and borrow the additional 10%. This is two mortgages (one covering 80% and one covering an additional 10%). You can then pay off the second mortgage when you sell your current home. The difference between this and bridge lending is that the 10% loan is secured against the new home, not the original one.
Should You Take Out a Bridge Loan?
Bridge financing can be a valuable tool for many people trying to buy real estate. It has a lot of benefits, especially for people who want to secure a deal or who aren’t ready to sell their home just yet. However, it also has some drawbacks.
On the one hand, you could potentially save money on your new home. Having a non-contingent offer means that you can usually offer a little less and still be competitive. Additionally, you will be able to move more quickly on opportunities, meaning that you may be able to snatch up a good steal.
Conversely, using bridge financing could mean that you end up paying your original mortgage, the bridge loan and the new mortgage all at once. Plus, due to the short terms, bridge financing tends to carry high monthly payments (although some are designed as interest-only payment models). If you are unable to sell your original home in a timely fashion, this can become an untenable situation.
You will need to carefully evaluate your options. Getting the timing of selling a home and buying a new one to line up properly can be challenging. When things don’t work out, you may end up sinking time and money into a deal that simply falls through. So, consider using bridge financing but make sure you understand how it works.
Get Started With Bridge Lending on South Florida Real Estate
Discover more about bridge loans today. With HML Solutions, you could get the right deal on a bridge loan for your new home in South Florida. Contact us to learn more.