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If you want to accomplish short-term financial projects while having an existing loan you could take a bridge loan before you secure a permanent financing. Although the bridge loans are short term loans with a financial period up to a year, they have relatively interest and it could be wise to compare bridging loan rates before choosing the loans that work for you. You might also need to have some form of collateral like an inventory or real estate when apply for bridge loans. Choose a lender who is willing to customize the bridge loans to fit different situations to meet your financial needs.
How the Bridge Loan Works
You can use the interim loans to purchase a new home while waiting for your initial home to sell. You could use the equity in the current home as a down payment when buying the new home, and it gives you an extra time and peace of mind as you wait for the current home to sell. Closed bridge loans have a fixed repayment and you should sign the contract that shows the repayment plan before getting the bridge loan. Contrarily, open bridging loans does not have a fixed repayment date, but you will be expected to pay the loans within a year. Whatever the bridge loan plan that you choose, the lender will be interested in knowing the repayment strategy. The company also might request to see the evidence of the new property that you will purchase and the price of the new investment and the proof that the current property is on sale.
Why the Interest Rates Are Important
Once you have sold your current home, the original mortgage will be discharged, and the bridging loan might be converted into the chosen home loan for the new property. The power of the compound interest could double due to two existing loans. The more time it takes to sell your current home the more the interest will accrue, and you might have to pay more for the property. The interest will be calculated daily and charged monthly and it thus adds up really quickly depending on the amount you had borrowed.
It could help to consider the length of the bridging period and the interests on the loan before getting an intermittent loan. Know all the conditions that your lender will impose on the bridge loan, some lenders might insist on selling the property for you if it takes longer to sell it on your own. When the lender sells the property, they could fail to consider market conditions that allow for maximum profits. Additionally, if your repayments change over the period it is prudent to calculate the interests for the period when you encounter changes in payment.
Pros of Bridge Loans
- The bridge loans are convenient, and they could help you secure a new property straight away before selling your current property.
- The bridge loan structure could allow you to make repayments only on the current mortgage
- You will avoid renting new while waiting to sell your current home.
Disadvantages of Bridge Loans
- You might be risking if you do not sell your current home within the given period, as you might be left with a large interest bill or risk getting the bank to sell your property.
- You may fail to sell your current house at a projected price, selling your home at a lower price could increase the amount of loan that you could pay in the long run. It is better to have a back-up plan to cater for the low property prices to avoid falling into financial risks.
- Loan costs include two valuation fees for the existing property and the new property that you are buying. These extra fees make bridge loans a bit expensive.
- Interest rates might increase if you do not sell the current property at the right time and the new loan could accrue also with delayed selling of the property.
- The termination fees also might apply if the lender does not offer bridging loans especially if you are switching the loans during a fixed interest period. It is prudent to read the termination regulations before engaging a bridge loan lender.
Bridge loans could help you buy a property while waiting to sell an existing one and it is prudent to conduct extensive window shopping before engaging a lender. The interest rates on these loans could be high and they could accrue over the repayment period and thus is necessary to survey for the best rates in the market. You should analyse all the costs involved in getting a bridge loan first to get the best out of the loan as it could help minimize on renting before getting new property.
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