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Bridge Loans

Bridge Loans

Many times consumers find the home of their dreams unexpectedly before they have time to arrange their financial situation to be in a positing to buy. A bridge loan allows a consumer to close on the purchase of a new residence without having to making a contingent offer. The currently owned home will not close until after the close of the new residence. A bridge loan allows the buyer to take equity out of the current home and use it as down payment on the new residence, with the expectation that the current home will close within a short time frame and the bridge loan will be repaid.

They can then sell their departing residence at their own pace which gives them time to hang out for the true market value and not have to fire sale the property.

Benefits of the bridge loan:

  • Close in 10 days or less
  • Potential for a zero down payment
  • Potential discount in the purchase price for a fast close
  • Us the equity in their current residence for the down payment on the new home
  • Allows sufficient time to sell departing residence and obtain the true market value
  • Comparable to an all cash offer from the seller’s perspective
  • Actually secure a desirable property in the current low inventory environment
  • Close when a regular conventional loan has been declined or taking too much time
  • Long term financing can be secured at a later date

Many consumers and agents can be leery of the costs associated with a bridge loan however when taking a closer look at the details it can make financial sense.

Here are the numbers based on a $500,000 purchase price with a $450,000 loan amount;

  • Potential 1% discount (could be more) in the purchase price for a 10 day close with a bridge loan = $5000
  • Potential 1% increase in the sale of their departing residence as the bridge loan allows sufficient market time. $4000 assuming a $400,000 sales price
Loan fees $8500 (Points)

Difference in interest rate from a 9.50% and  4.50% (rate on a regular conventional loan is $1875 per month

Assuming 4 months market time to sell their current home and obtain a regular conventional loan = $7500

  • $16,000 is the total cost of a 4 month hold time for the bridge loan
  • $9,000 potential savings from using a bridge loan
  • $7000 total cost of bridge loan

The total cost is also a write off and the potential savings could be much greater as the numbers illustrated are very conservative.

Many times a seller will take a 10 day close, non-contingent bridge loan offer at 5% lower price than an offer with a typical 30 day close traditional loan so there are scenarios where using a bridge loan could be profitable.

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Louie Loans is a California Department of Real Estate licensed Broker -BRE License #01953048

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