Bridging loans have become more popular in recent years, specifically after the housing bubble burst. They exist to help new homebuyers filling the gaps between the closing sale and selling the current home or other venture in order to pay for the new sale. While these loans can be used in other areas of life, they are most often seen in property transactions.
For example, a couple who wants to sell their starter home will put it on the market and start looking for a new home. They find the perfect house and make an offer. However, they are still waiting for their current home to be sold, meaning that they are about to accrue a new huge debt while having no line of credit open. These days banks are reluctant to loan more than they absolutely have to, so they may not give the couple the money they need to start making payments on the new home. What can they do?
This is where bridging loans come in. They exist to make sure that the couple are financially covered while they wait to sell their current home. They are very convenient and not too difficult to get, but come with a lot of pratfalls.
These loans can be given to anyone in need of them, but are most often given to people who are new to the game of home buying. But they can also be given to rich investors who buy at auction and need a mortgage fast. If you fall into the former category, then there are some things that you need to know about bridging loans – namely that they never work out the way you planned.
Sure, this seems simple enough. You buy a place and need of money fast. So you get a bridging loan to cover the debt, knowing that as soon as your line of credit opens you can pay back the loan. Except it almost never works out that way. Like many other types of loans, bridging loans can be quite dangerous to people who don’t know what they’re doing. They often trap you in a cycle of debt. How do they do this? By having outrageous interest rates that mean you end up paying a lot more than you originally borrowed.
How do you avoid this, especially when you really need that bridge loan to begin with? The number one piece of advice that anybody can offer you is to make sure that you have a good exit strategy. Like any other loan, you want to bring this one off as soon as possible. The sooner, the better, because then you won’t end up paying all that interest.
The easiest way to make sure you don’t fall into the trap is by having a buyer lined up for your current property. Maybe you need that loan because it’s taking a long time to close. However, you know that it will be and that the new buyer is good for it.
No matter how you go about your exit strategy, you need one to begin with. For a lot of people bridge loans are a necessary evil. But that doesn’t mean that they have to haunt you for the rest of your life and wreck your credit. Know what you are getting into when you sign that dotted line, and plan to be rid of that debt as soon as possible.
There is a bit of good news. Due to so much competition in the bridge loan market, some companies are lowering their interest rates to get more business. This works in your favor since you won’t have to worry as much about the interest. This doesn’t mean that you are in the clear and that you don’t have to worry about paying it back in a timely manner, though. It’s just some extra precautions to take.
When you sign up for a bridge loan, prepare for it never working out the way you planned it to. Don’t take out more than you have to, and get the lowest interest rate possible. Have a buyer lined up for your existing property. After that, it’s just good financial planning skills and a lot of discipline.