Written by Charlotte Wood (last updated February 21, 2009)
In today's modern banking world there are so many different types of loans out there that it can be hard to figure out what's what. One of your loan options you can consider when working with real estate is a bridge loan. Highly useful when dealing with your home, bridge loans can be a bit risky financially but can also prove an asset as you're transitioning between houses.
Really a bridge loan is exactly what it says it is: a loan to bridge the gap between selling one house and closing on another. Bridge loans are often used to pay off a mortgage on the previous home and make the down payment on the new house, serving as needed cash to make that residential transition. Bridge loans are also different from other loans because they rely more on the equity of your home rather than on the credit of the borrower.
These loans are short term (six to twelve months) and usually carry higher interest rates. The repayment of these loans traditionally comes out of the sale of the previous home. Basically bridge loans are an advance of money so you can make a transaction; the amount is quickly repaid.
Like any other loan however, bridge loans are still loans and can put you deeper in debt. They're actually more secure than other loans because they're so short-term and the money is more likely guaranteed than with other debt-incurring endeavors. The use of a bridge loan is clear cut: you bridge the gap between the sale of one house and the purchase of another. You borrow what you need and pay it back quickly, resulting in a relatively low risk loan for yourself.
As with any other loan you may take out, shop around before deciding on one. You want to find the best rate, the best terms, and the one that fits best into your other real estate and mortgage endeavors. Collect as much information as you can and always check your finances and make sure you can handle the incoming debt; if your circumstances can't handle it then keep shopping for the one that your account can deal with.
Bridge loans can be great when you're moving and going through the complicated and time consuming closing process, but still approach with discretion and caution so you don't make a bad financial situation for yourself.
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