by Dr Pandula Siribaddana

Created on: August 07, 2011   Last Updated: August 08, 2011

Bridge loans could be described as an interim loan, which can facilitate the buy of a new house before the existing house can be sold. Although the terms and conditions governing such loans can vary widely from one financial institution to another, the general features of such loans remain the same. Thus, knowing the advantages and disadvantages of obtaining a

bridge loan will prevent a person from becoming unnecessarily burdened by two loans even for a short period of time.

Advantages of a bridge loan:

First of all, the possibility of obtaining such a loan, even in the presence of an existing mortgage, will enable the buyers to capitalize on good buying opportunities which otherwise may be missed. It requires relatively little time and will relieve the buyer from having to worry about obtaining the down payment for his or her new house. In contrast to a mortgage loan, the collateral for the bridge loan would be the equity provided by the house to be sold even before it attracts any potential buyers.

Usually, there are no qualification guidelines in obtaining a bridge loan although the lender may judge one’s ability and the eligibility before offering the same. Furthermore, the hazel of obtaining a mortgage loan for the new buy may be reduced as the same lender can covert or extend the bridge loan into a regular mortgage loan after the bridge loan has been closed.

Disadvantages of a bridge loan:

One of the main disadvantages of a bridge loan is the relatively higher fees involved and may include fees such as administrative, notary, escrow, courier etc. Adding to these expenses, it would also require closing down of two loans at the time of termination. Furthermore, the up-front interest pay would be from the proceeds of the bridge loan and when the fees and the up-font interest adds up, there may not be enough proceeds to make the down payment for the new house. However, the borrowers may be able to strike a deal with the lender depending on the circumstances and the institutional policy.

At the same time, the bridge loan is usually offered at a higher interest rate than the usual mortgage loan and until the old house has been sold, the borrower may end-up paying two loans at the same time for a certain time period. If the old house cannot be sold immediately, the borrower may have to continue paying a high interest rate for a prolonged period.

Lastly, the bridge loan will only cover 80 percent of the market value of the new property and one may have to seek other borrowing mechanisms or utilize money at hand to fulfill the remaining 20 percent.

Conclusion:

In any event, surveying the available options for bridge loans in several financial institutions will enable a person to select the best deal while seeking professional support from mortgage experts can also be recommended.

Learn more about this author, Dr Pandula Siribaddana.
Click here to send this author comments or questions.