Bridge financing, also known as a bridge loan, is a short-term loan intended to provide a temporary borrowing solution
Bridge financing, also known as a bridge loan, is a short-term loan intended to provide a temporary borrowing solution to supplement some or the entire sum of the down payment for the purchase of a home. From the perspective of the borrower, bridge financing is essentially a way to transfer “available” equity from one home to another. In the real estate world, bridge financing would be needed in a situation where the closing date for the purchase of your new home occurs before the date of closing for the sale of your existing home. The assumption is that the down payment for the purchase would have come from the sale of the existing property. However, if your purchase is expected to close prior to the closing of your sale, then you would need a temporary loan to “bridge” the shortfall to close the purchase.
From the lenders standpoint, they would advance the short-term loan at a premium (compared to a traditional mortgage) until the existing home is officially sold. Since the lenders are expecting the bridge loan to be repaid in a short period of time, the loan itself would be open for repayment (in most cases). The interest rates on bridge loans usually start at prime plus two percent and can be higher depending on the lender and borrower’s application. Once the loan of the existing home is complete, the lender would be repaid with interest and applicable fees from the proceeds of the sale.
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