Private bridge loans: What they are and how they work

Supposing you are a real estate buyer, you may be thinking about different mortgage options if you have found a home that you have decided to acquire. Besides the different fixed-rate and adjustable-rate mortgages, there is another kind of loan called private bridge loans that you can explore. In short, if you wish to purchase another home before you sell your current home, you can try bridge loans to help you solve your financial problem that may arise in that situation. Here is what you need to know about bridge loans

What is a bridge loan?

Private bridge loans exist in short-term form until a person or company secures a permanent financing solution or removes an existing obligation. This type of loan will allow the user to meet their current obligations by providing them with immediate cash flow. They have high-interest rates and are normally backed by collateral such as inventory or real estate.

How does a bridge loan work?

This type of loan can come into various options, but there are two main options that private’s lenders always package to meet different borrower’s needs. They are

Hold two loans: in this case, you can borrow a loan equivalent to the amount between the current loan balance that you are servicing and up to 80% of the current home value. You will apply the amount in this second mortgage to cater for the down payment of the second home you are buying while you keep your first mortgage intact until the time you will be able to pay it all off when you sell it.

Roll both mortgages into one: under this option, you can take out a large loan for up to 80% of your current home value. Once you have paid off the first mortgage balance, you can then apply for the second loan towards your next home’s down payment.

Many homeowners prefer using a private bridge loan to allow them to have a contingency-free offer whereby they can acquire new homes without having the pressure of selling their existing homes.