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A bridge loan can be an appealing short-term financing option when you need funds quickly for a home purchase or other major expense But like any loan, it comes at a cost. So how much does a bridge loan really cost? Here’s a detailed look at the major fees and factors that determine your total bridge loan costs
Upfront Costs
Interest Rates
The interest rate is the main cost of a bridge loan Rates are generally higher than traditional mortgages, ranging from the prime rate (currently 8.5%) up to prime plus 2% or more The higher rate accounts for the short-term, convenience nature of bridge loans. Expect rates around 10-12% or potentially higher depending on your specific loan terms and credit profile.
Origination Fees
Lenders typically charge an upfront origination fee of 1-3% of the total loan amount. This covers processing and underwriting costs. On a $100,000 loan, you’d pay $1,000-$3,000 in origination fees.
Other Closing Costs
As with traditional mortgages, you’ll face various closing costs with a bridge loan such as:
- Appraisal fees
- Credit report fees
- Application fees
- Attorney fees
- Title fees
- Recording fees
These can add $2,000-$4,000 or more to your total upfront costs. Shop around among lenders to find the best combination of rates and fees.
Ongoing Costs
Interest Payments
In addition to interest paid at closing, most bridge loans require monthly or quarterly interest-only payments. On a $100,000 loan at 10% interest, that equals $833-$1,000 per month. Make sure you can afford these payments until the loan is paid off.
Property Taxes and Insurance
If using your home as collateral, you must keep up with property tax and homeowners insurance payments. Failing to do so gives the lender the right to call the loan due or force-place expensive insurance coverage.
Home Maintenance
Don’t let your current home fall into disrepair simply because it’s temporarily collateral for a bridge loan. Keeping it well-maintained helps preserve value as an asset backing the loan. Expect regular expenses for upkeep and repairs.
Mortgage Payments
You’ll need to keep making payments on your current mortgage if using that home as collateral for the bridge loan. This avoids defaulting on your primary home loan.
Loan Extensions
Bridge loans often run 6-12 months. If you can’t pay off the balance within that term, loan extensions may be available but likely at a cost. Extension fees typically run 1-2% of the remaining balance.
Total Cost Analysis
On a $100,000 bridge loan here are sample total costs:
- Interest rate: 10%
- Origination fee: 2% = $2,000
- Other closing costs: $3,000
- 12 months of interest at $833/month = $10,000
- Loan extension fee of 1% = $1,000
That’s over $16,000 in total costs on a $100,000 bridge loan. And that doesn’t even factor in taxes, insurance and other expenses needed to maintain the collateral property.
Clearly bridge loans allow fast access to funds but at a steep price. Make sure to run the numbers carefully and have solid repayment plans before taking the plunge. Also shop extensively among lenders to help minimize costs. While bridge loans fill a niche, the high costs mean they aren’t the right solution for everyone.
When Bridge Loans Make Sense
Despite the high costs, bridge loans can still be useful in certain situations:
- You need to move quickly for a new home purchase or major expense
- You have significant home equity but need funds before selling your current property
- You found a hot property in a seller’s market and need to act fast
- You have an urgent need for cash and don’t mind paying higher rates for speed and convenience
The key is going in with eyes wide open on costs and ensuring you have realistic plans to repay the loan within the initial term. For those with ample equity and an urgent need for funds, bridge loans can be an expensive but viable option.
Lowering Your Bridge Loan Costs
Here are some tips to get the lowest rates and fees:
- Shop extensively among lenders for the best offers
- Opt for a shorter 6 month term to reduce interest costs
- Pay interest upfront rather than monthly to potentially lower the rate
- Put down a larger down payment if possible to reduce the borrowed amount
- Have a very strong credit score and financial profile
- Only borrow what you absolutely need to limit fees and interest
The Bottom Line
Bridge loans provide fast access to funds but charge higher rates and fees compared to other financing options. Make sure to analyze costs closely and have concrete plans for repayment within the short loan term. While expensive, bridge loans fill a unique role in helping borrowers in a temporary bind get necessary financing quickly. Just approach with clear eyes and precautions to avoid getting caught in a tricky financial situation.
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When to consider a bridge loan
Home bridge financing is used most often when a homeowner plans to buy a new home before selling their current one. A bridge loan might be a good fit if:
- You found a new home, but the seller won’t accept a contingency mandating you sell your current home.
- You can’t come up with the down payment for a new purchase unless you sell your current home.
- Your closing date for your current home is after your settlement for the new one.
- You’ve found your new dream home in a seller’s market — and you need cash fast to beat out the competition.
- Credit score: Because bridge loan lenders have much more underwriting flexibility, you might be able to get a bridge loan with a credit score as low as 500. Other lenders require scores in the high-600s.
- Debt-to-income (DTI) ratio: Some bridge loan lenders allow a DTI ratio as high as 50 percent.
- Equity: If you’re taking a traditional bridge loan, many lenders require at least 15 percent equity in your current home. Others require 20 percent.
How Much Does Bridging Finance Cost | BRIDGING FINANCE EXPLAINED | Property Education | Ste Hamilton
FAQ
What are the cons of a bridge loan?
What is a typical interest rate on a bridge loan?
Are bridge loans hard to get?
What is the typical interest rate on a bridging loan?
What is a bridge loan & how does it work?
A bridge loan gives the homeowner some extra time and, more often than not, some peace of mind while they wait. However, these loans normally come at a higher interest rate than other credit facilities such as a home equity line of credit (HELOC).
What is the interest rate on a bridge loan?
Bridge loan interest rates typically range between 6% to 10%. Meanwhile, traditional commercial loan rates range from 1.176% to 12%. Borrowers can secure a lower interest rate with a traditional commercial loan, especially with a high credit score. However, that means enduring a long processing time of at least 3 months. What do lenders look for?
How much money does a bridge loan pay off?
A bridge loan for 80% of the home’s value, or $240,000, pays off your current loan with $40,000 to spare. If the bridge loan closing costs and fees are $5,000, you’re left with $35,000 to put down on your new house. Let’s again say your current home value is $300,000. With $200,000 on the mortgage, you have $100,000 in equity.
What are the fees associated with a bridge loan?
Some other fees you should be aware of with bridge loans: Closing costs and related fees: Bridge loans require closing costs and fees, much like you’d pay with a traditional mortgage. These fees may include administration fees, appraisal fees, escrow, a title policy, notary services and potentially other line items that your lender will explain.