• Bridge Loan

    A bridge loan (also known as “Swing loan” or “Caveat loan”) mortgage is an interest only loan, secured on your current property, to allow the proceeds to be used for buying new property, before selling the existing property. A bridge loan is. It is a short-term loan typically taken out for a timeframe of 1 week to 3 years. As the name indicates, it basically bridges the gap between the sale of old property and purchase of new property.

    Let us take one example. Suppose one customer plans to purchase a new house for USD 500,000 and possession is on 1st November. The customer needs to deposit 10% (USD 50,000) before 1st November to confirm the purchase.

    At the same time, the customer wants to sell his one existing home for USD 400,000 with a closing date of 1st January. It means the customer will get USD 400,000 once he will sell his home on 1st January. As the customer won’t get any money before 1st January, he will need Bridge Financing of USD 50,000 for 2 months to buy his new home.

    As it is explained in the example above, the main purpose of the bridge loan is provide customer temporary loan for a short duration so that he can buy another home even before selling his existing home.

    Key Characteristics of Bridge Loan

    • Bridge loan is secured by the existing property which is used as a down payment for the new property
    • These are short term loans, normally for less than a year or on the sale of the existing property
    • The interest rates are usually quite higher on Bridge Loan than other loans because it is a short term loan
    • Bridge loan involves higher interest rate compared to other conventional mortgage loans. Also it involves higher closing and other fees
    • The rate of interest is determined by Credit rating of the customer, Type of Bridge loan (Open or Closed), Loan term and Collateral value.
    • Bridge Loan Mortgage option is available for first or second mortgage buy
    • To be eligible for a bridge loan, borrower must be financially able to pay both mortgage payments in case he is not able to sell his existing property immediately
    • Borrower are  given payment holiday period based on the loan term at the end of which the borrower will make a Bullet payment of Principal + Interest accrued
    • When borrower sells the current home, the bridge loan is paid off. If it is sold within the maturity term, any unearned interest payments will be credited to borrower.
    • In case of extended bridge loan mortgage, Loan Amount will be equal to Total Loan Balance at the end of the maturity. Amortization Schedule will be generated based on parameters as applicable

    Types of Bridge Loan

    Bridge Loan Mortgage can be of two kinds; one is ‘Closed’ bridge loan and another is ‘Open’ bridge loan. A ‘Closed’ bridge is only available to home buyers who have already exchanged on the sale of their existing property. An Open bridge loan refers to a loan when the customer has not yet sold off their existing home in the market which leads to higher interest rates.

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