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How Does a Bridge Loan Work? Explained


While bridge loans offer a quick solution, they’re not your only option. Some loan options may be better for you financially. Consider these alternatives:

1. HELOC

A Home Equity Line of Credit (HELOC) allows you to borrow against your home’s equity, even if you have bad credit. It’s a flexible option, often with lower interest rates than bridge loans. HELOCs provide a revolving credit line, making them suitable for ongoing expenses or as a safety net during the home-selling process.

Taking a HELOC instead of a bridge loan can result in financial issues if you’re unprepared for its balloon payment. That’s a large final payment due at the end of the loan if the full amount of the loan isn’t repaid by then. People often experience “HELOC shock” because they’re surprised by an unexpected balloon payment.

Before getting a HELOC, carefully review the loan paperwork to learn the balloon amount you’ll be expected to pay. Create a payment plan or plan to refinance your HELOC into a traditional loan before the HELOC term ends to avoid balloon payment surprises or money problems, including potential foreclosure, later.

2. Cash-out refinance

This involves refinancing your current mortgage and taking out the difference in cash, which you then use for your new property purchase. It’s a viable option for those with significant equity in their home and can offer lower interest rates compared to real estate bridge loans.

3. Personal loan

Unsecured personal loans can be used for any purpose, including real estate transactions, though they might come with higher interest rates. They are a good option for borrowers with strong credit profiles who need smaller amounts of funding.

4. 80-10-10 Loan

Also known as a “piggyback loan,” this involves taking out a mortgage for 80% of the home’s value, a second mortgage for 10%, and paying the remaining 10% as a down payment. Because you’ve put a 20% down payment on your home when you take out this mortgage, an 80-10-10 loan helps you avoid paying private mortgage insurance, or PMI. That’s insurance you’d have to buy if you don’t put at least 20% down on your home. PMI protects the lender if you default on or don’t pay your mortgage. It’s usually included in your monthly mortgage payment. An 80-10-10 loan can be a cost-effective alternative to bridge loans.

5. Home Equity Loans

Like a HELOC, a home equity loan provides a lump sum based on your home’s equity but with a fixed interest rate. It’s suitable for those who need a specific amount of money upfront and prefer the stability of fixed payments.



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