When you move from one home to another, there are always bumps in the road. Sometimes, the road goes out, and you need a bridge to get to the other side. Bridge loans are short-term loans that give you access to cash that you can use to make the transition a little smoother. Our real estate agents often help clients who use bridge loans to pay off existing debts, finance their new home, and other things. There are advantages and disadvantages to bridge loans, and buyers should fully understand the benefits and drawbacks involved before applying for the loan.

Bridge Loan Basics

Bridge loans are short-term, with most having repayment periods of between six to 12 months, but some can extend to two or three years. These loans are typically used by homeowners who wish to purchase a new home before their current home is sold. Homeowners can tap into their equity to secure a down payment, remodel the home they want to purchase, and cover expenses until the house sells.

Most people choose bridge loans because they need the money for a down payment or because the need to move arises due to job transfers. Other common reasons include a gap between a new home's closing date and the current home's closing date.

Interest rates vary from lender to lender, so it is wise to choose the lender carefully. Ideally, you will want to get a bridge loan with the same lender with whom you want to issue your new mortgage. As with all loans, homeowners need to meet the lender's lending criteria regarding credit history, credit score, debt-to-income ratio, and loan-to-value ratio. And, in most cases, you will need a minimum of 20% equity in your existing home to qualify before you can secure the loan to purchase any Klamath Falls homes for sale you have your eye on.

Advantages of Bridge Loans

Bridge loans are ideal when unexpected transitions occur, such as for work. They provide short-term financing that can give you the case you need for down payments, moving expenses, remodeling, etc. Further, most bridge loans have a grace period of a few months before the first payment is due. This can give you some breathing room and alleviate some of the financial stress inherent to moving.

These loans can bypass a seller's concerns about sale-contingent purchase offers, giving you an advantage in a hot market where contingencies typically receive a frosty reception. In a seller's market, when you have significant equity to tap into, this can help you maintain the advantage of putting a larger offer down to get the home you desire.

Drawbacks of Bridge Loans

Bridge loans have higher interest rates ranging from 6% to 10.5%. Shopping for a loan at the lower end of the range is vital. Further, most lenders will cap the loan at 80% of the value of both homes combined. Finally, buying a new home before your current home sells means you will have to maintain two properties simultaneously, which can be difficult, and it's even more challenging if your new home is a considerable distance away.

Our team is always prepared to answer your questions about mortgages, bridge loans, and more. Contact us to learn more about your financing options and the strategies you can use to move into your new home before your current home sells.