Purchasing a new house or apartment requires significant capital, whether through a loan or a personal contribution. Selling a property is a practical solution to finance your new investment by reducing the loan amount. If the resale doesn’t close immediately, taking out a bridge loan offers a convenient alternative. Let’s take a closer look at the benefits of this type of loan.
How Does a Bridge Loan Work?
With this arrangement, property owners don’t have to wait for their property to sell before investing in a larger home. Essentially, a bridge loan replaces the expected proceeds from the sale of a property to fund a new purchase, after deducting the balance of any current mortgages. It complements a mortgage loan in cases where the cost of your future acquisition exceeds the funds obtained from selling your property. Generally, lending institutions offer this type of loan with a one-year repayment term, renewable at the client’s request. However, this period may range from 3 months to 3 years, depending on the lending terms set by your creditor. This timeframe allows you to maximize the benefits from selling your owned property. It is possible to make an early repayment, usually with a penalty fee, if the proceeds from the sale allow you to do so.
What Is the Maximum Amount for a Bridge Loan?
In most cases, banks offer bridge loans up to 80% of your home’s value. Under optimal conditions, creditors may provide up to 90% of the estimated price. This percentage accounts for any potential devaluation of the property’s estimation at the time of sale completion. It is advisable to evaluate your home as accurately as possible before taking out your loan. This prevents you from being liable for the difference between the amount of the loan and the sale proceeds to your lending institution.
Bridge Loan Repayment
Bridge loans come with a fixed interest rate. Depending on the requested loan amount and repayment term, most creditors charge interest ranging from 2.05% to 3.8%. The capital itself is repayable at the loan’s designated term. Meanwhile, the interest must be paid every month or at the end of the loan period.