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Be Sure That You Can Afford A Bridging Loan

Bridging Loans are short-term loans that are taken out pending a long-term or larger financing. A good example for the use of this loan is property. If you want to buy a new home but do not yet have the funds because your old house has not yet been sold, you can take out a this loan to pay for the new home, until the old property has been sold. The payment for the old house is the larger financing, but bridge loan is what you need in order to pay for the new house before someone else buys.

This type of loan can be risky. Before thinking of applying for one, consider first your other options. If you think you can raise the money to bridge the gap between the buying of the new house and the selling of the old house, by all means, do so. Bridging loans are considered as the last option because of the higher interest rates which can be anywhere from 11% to 15% and the shorter time to pay it which is usually from 1 week to 2 years. Most people who take out this loan have to mortgage their property or use it as collateral just to secure the loan.

There are two kinds of bridging loans on the market, the first being closed, this loan is only available to buyers who have already sold their property and are just waiting for the sale to be finalized. Since the exchange is basically a done deal sale, lenders are more prone to offering closed bridge financing. On the other hand, an open bridge is when the buyer wants to buy a new property but has yet to put their old property on the market. There is uncertainty in this type of loan and lenders will want to make sure that you have plenty of equity in your properties. Open bridge loans usually have a twelve-month limitation so be careful if you plan to take out this kind of loan.

If you are new to bridge loans, this is how it usually works. The lender or bank will want to see the offer on the new property you want to buy as well as proof than your old house is already in the market. The lenders, for their benefit and safety, will need to know how you intend to pay the loan as well as the interest rates. It is important for the person who wants to borrow to have a strategy or plan if the sale falls through. When it comes to interest rates, the borrower has two options. The borrower has the option to go with a lower arrangement fee or a lower rate of interest. Remember to choose carefully. If you think you can pay off the loan within weeks or months, it is better to get a loan with a lower arrangement fee but if you can’t pay it immediately, then the lower interest rate is a much better option to choose.

These types of loans are useful when you are in immediate need of cash. But always know your limits. If you are not confident that you can pay it, do not get.