The bridge loan is a special tool available to borrowers. This is a special, short-term loan intended to cover the period between the conclusion of the purchase of a property and the final establishment of the payment arrangements. We sat down with mortgage broker and blogger Chris Molder on sonofabroker.com to get a quick question-and-answer (Q & A) about bridging loans. In what situation do you need interim financing?
If you buy a new home before your current home is sold, you may not have the money needed for the down payment because it will be tied to the capital of your current home. A lender will provide you with interim financing to help you out until you receive the money from the sale of your home. For example, if you sell your home in 90 days and buy a house that needs to be paid in 60 days – interim financing covers the 30 day cash flow space.
How is the bridge loan amount calculated?
The bridge loan amount is calculated as follows:
PURCHASE PRICE – [Deposit for Purchase + Mortgage Amount] = RELEASE LOAN
or DEPOSIT ON PURCHASE + RELAY LOAN = DEPOSIT
How much does a bridge loan cost?
Bridge loans are generally valued at about the same price as a loan open or close to the cost of a personal line of credit. The interest rate will certainly be higher than the interest rate of your mortgage, but given the short-term horizon, the interest rate will not have much impact. Currently, the prevailing prime rate is + 2.00% (or 5.00% effective rate). Typically, lenders will also charge an administration fee to set up a bridge loan worth between $ 200 and $ 500.
What is required to arrange a bridge loan?
In order to set up a bridging loan, your lender will ask you for a copy of your firm purchase agreement and a firm sale agreement.
What happens if I do not sell my house?
The lender will not be able to provide you with a bridge loan if you do not have a firm sale agreement for your home. The loan can not be endless for institutional lenders and typically bridge loans are limited to 90 days. If you do not have a firm sale date, you may need to consider a private lender for the bridge loan.
Do all lenders provide bridging loans?
If you think you might need a bridge loan, notify your mortgage broker because not all mortgage lenders can offer you one.
Are bridge loans recorded on the security?
It depends on the lender, the amount of the bridge loan and how long it will take for a lawyer to register the title loan. If the loan is registered on the title, the borrower may incur other legal fees. Other lenders will simply extend the bridge loan as a promissory note that does not need to be registered on the title.