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How do bridge loans work?

Buying and selling East Wenatchee, WA real estate? Find out how a bridge loan can tide you over until you sell your current home.

What is a bridge loan?

Also called bridge financing, this type of loan “acts as a bridge” and provides immediate cash flow to help borrowers meet on-going obligations. The borrower, typically a private individual or company, can use a bridge loan until they are able to secure a more permanent source of financing or until they are able to settle existing loans and financial obligations.

The catch? These loans are short-term, typically covering a six-month period up to a year. Interest rates are very high and the loan itself must be backed by collateral, usually in the form of property.

Individuals planning to buy a home with proceeds from the sale of their current one typically use bridge loans to cover the time between closing the sale and finding a new property.

Using a bridge loan allows you to take out a loan against your current home and other assets in order to make a down payment on another home. However, lenders will typically want you to have at least 20% equity in your existing home.

Moreover, you have got to be able to sell your home fast because of the shot-term coverage of this loan.

Bridge loans versus traditional loans

Generally speaking, application and approval for bridge loans are much faster than traditional loans. This makes them more convenient for homebuyers who need to secure funding and act quickly.

In exchange for the speed and convenient access to funding, however, borrowers must be amenable to high-interest rates and origination fees. The relatively higher interest rates are offset by the short duration of the loan, however, and many borrowers have the option to pay off their bridge loans with lower interest, long-term financing.

Moreover, the majority of lenders offering bridge loans don’t charge repayment penalties.

The costs associated with bridge loans

So just how high do interest rates go? The rates ultimately depend on the loan amount and your creditworthiness but Forbes provides an estimated range of 3.25% to as much as 8.5% and 10.5%.

For businesses, bridge loan interest rates are much higher, ranging from 15% to 24%.

In addition to interest rates, borrowers must also shoulder additional fees:

  • Loan origination fee
  • Administration fee
  • Appraisal fee
  • Escrow fee
  • Title policy costs
  • Notary fee

Closing costs and fees typically fall between 1.5% and 3% of the loan amount.

If you’re buying and selling property at the same time, Coldwell Banker Cascade Real Estate is here to assist you. You can reach our team here. You can also contact us at 509.888.8887 and info(at)cbcascade(dotted)com. We can’t wait to start working with you!