There may come a time when you find yourself in a transitional situation with housing. You could be in the process of selling your existing house, but you do not want to wait to put down money on your next home.
If that should happen, you may find yourself short of the money you need to finance the down payment. For that purpose, you can consider taking out a short-term loan called a “bridge loan.” This type of loan is secured, with your present home acting as collateral.
Bridge loans are not as common as they once were and tend to be handled very much on a case-by-case basis. In some cases, they are the best fit, but in others, it may be more appropriate to go with a home equity loan or line of credit.
Here are some of the pros of bridge loans:
- With a bridge loan, you give yourself far more flexibility in terms of the timing of both the sale of your current home and the purchase of your next home. You do not need to wait for your current home to sell before making your down payment on your next home.
- You may have more bargaining power. Say you see a house that you love, and you want to make an offer. You tell the seller that you are certain you will purchase the house once yours sells. You may have every intention of following through, but the typical seller will not take this seriously. The seller is looking for certainty, not surprises. If you have a bridge loan, the seller knows that you can afford the down payment and that your house does not need to sell by a certain date for you to make the purchase.
- You can get the house you really want. While a bridge loan is an added cost and complication, it may make the difference between whether you can buy your dream home or not. Over the long term, both the tangible and intangible benefits of living in the house you really love may vastly outweigh the short-term inconveniences of the loan.
- Bridge loans typically offer a fair degree of flexibility when it comes to repayment options.
- There may be a grace period before you must make payments on the bridge loan. Oftentimes, this period lasts for several months. Just be aware that the loan is still earning interest even during the months when you’re not making payments.
Here are some of the cons of bridge loans:
- You will need to make payments on the principal and interest of the bridge loan. While this is obvious, in many cases, it may be an entirely avoidable financial burden. If you pay the loan off early, there may sometimes be a prepayment penalty (as this is a short-term loan product however, you may be able to avoid that).
- You are expected to pay back the bridge loan relatively quickly. Hypothetically, this should be feasible once you sell your existing house. But it does mean making large payments. If there is an issue selling the current house or obtaining financing on the new one, this may lead to problems.
- For some period, you may find yourself as the owner of two properties. Bridge lenders consider then when deciding whether to offer you a loan. Owning two homes even for a short time period can strain your budget, and any uncertainty concerning the sale of your existing property adds to the risk. This can make it harder to qualify.
- Competing products like home equity loans and lines of credit are often less expensive than bridge loans, which is one reason they have risen in popularity over the years.
We Can Help You with Your Bridge Loan Needs
Think a bridge loan in Los Angeles may be right for you? We can assist you in examining the pros and cons with reference to your financial situation and needs. We also can connect you with a competitive, flexible bridge loan if you qualify. Please give us a call at (310) 478-5005 to schedule your Los Angeles bridge loan consultation.