A bridge loan is a loan which lets you purchase a property or a new home before you finish a sale on your current property. Because the housing market has become very tight, not so many people can afford to thrive in these loans. However, the Arizona bridge loans ask for around 20% equity from the current home or property. It has high-interest rates, fees, and has the most potential in areas where houses sell fast. Let us dive more into Arizona bridge loans.
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In most cases, the old property would be contractually bought before you place an offer to purchase a new one. The cash from this sale would be used as the down payment, and after moving, you get into your new home. However, this does not apply to most people, and hence, bridge loans become the ideal option.
Bridge loans have numerous benefits with the main being the more time between transactions as a result of accessing the home equity before the sale. As a result, the loan will help you avoid taking contingent routes on the property you want to purchase. These contingent routes can help you to get out of a contract if the current home does not sell. This is why some home sellers do not appreciate them. In the seller’s market, it is hard for people with conditions to compete with those with money.
How bridge loans work
Just like in any other mortgage, when applying for this loan, you will expect similar debt to income and credit requirements. In most cases, lenders will not go above the 80% loan to value ratio. Due to this, you will be required to have at least 20% and high equity in your property if looking for the bridge loan.
These loans are only used in two ways; the first use is as a way of paying off your mortgage to avoid dealing with a lot of money for the down payment. The other purpose is for another mortgage, which will end up being used as the down payment for the new house or property. These instances only assume that the old house sells. If the home does not sell in time, you will owe the whole loan amount together with the second mortgage. This can be a daunting task which will lead to financial stress compelling you to default.
Advantages of a commercial bridge loan:
- The payments are usually only ever interest. It is either deferred to the time the new home is sold.
- The other advantage is that it is possible to make an offer for the property without a sale contingency.
- Disadvantages of commercial bridge loans
- You can pay high rates of interest where lenders use variable prime rates that can rise with time
There is also a chance that you can own two properties at the same time and have to pay both mortgages.
In some cases, you can pay for an appraisal, closing costs, and extra fees.
There is also a constant 80% loan to value ratio, which means that you will need over 20% equity so as to acquire money for the property you want to get.
Situations where bridge loans can help tremendously:
- Where sellers will not allow contingent offers, especially in your region.
- Where the closing on your old house is happening after the closing date of the new home
- Where you cannot afford a down payment without the current property funds
When there’s a certainty, your house will sell, but you want to secure a new one before you sell the old one.
How to find bridge loan mortgage lenders
As always, the first place to find is local. Ask around from friends and family who have used similar services before. You can also search the internet for bridge loan lenders with the best reputation. Always avoid collateral-based lenders who are advertising everywhere, easy, and offering for fast cash. Remember that, when the deal is too good to be true, probably it is not. They can have hidden special rates compared to others.
Bridge loan alternatives
If you cannot find bridge loan lenders in your area or see them, they are too risky for you, never give up! Numerous options are more affordable and more comfortable to afford. However, most of these will have you maintain multiple mortgages until the old house sells.
HELOC Loans (Home Equity Line of Credit) – This is a second mortgage which will allow you to access your home equity just like with the Arizona bridge loan. However, there will be better rates of interest, and you will have more time paying it off and paying the closing costs, which could be lower. HELOCs typically allow you to use the funds in other ways such as home improvements and increase the value of the home.
However, you cannot get HELOC on houses that are for sale. This, therefore, requires action in advance and always avoids those that require you to prepay for anything as they can cut into profits if the house does sell in a timely manner. Before making the decision, consult our experts at Arizona Mortgage pros and get expert advice on the best loan for you.