What exactly is a bridge loan and what can it do for you? A bridge loan is simply a short-term loan used by a person or business that needs a fast cash infusion until permanent financing can be achieved. A bridge loan, sometimes referred to as a swing loan or gap financing, is generally expected to be paid back very quickly. Most bridge loans have a term of about six months to one year.
When would someone need a bridge loan? Bridge loans are often used by prospective home buyers who are ready to buy, but who have not yet sold their current home. When the housing market is booming and houses are selling within days or weeks of being listed, a bridge loan makes little sense. But what about those times when the housing market seems to be moving along at a more reasonable pace?
Imagine, for example, that you find your dream home. You are eager to purchase it, except for one major setback: you need to sell your current home first. In the meantime, you can snatch up that dream house by applying for a bridge loan. A bridge loan can allow you to pay off the mortgage on your current house, or gather enough cash to make a down payment on your dream house while you wait for your current home to sell. In hindsight, the opposite situation would be ideal: selling your home, and then finding your dream home. But since life, and especially issues of personal finance, are not always ideal, a bridge loan is a viable option for anyone who finds themselves caught in between.
The terms of a bridge loan can vary widely. Some types of bridge loans allow you to completely pay off the mortgage on your current home. A fairly typical bridge loan might work as follows: the bridge loan is used to pay off the mortgage on your current home, and the rest of the money is used to make a down payment on your new home. In this type of scenario, closing costs and six months of prepaid interest are normally subtracted from the loan amount. If the first home is not sold after a period of six months, the borrower is usually allowed to begin making interest-only payments on the bridge loan. When the first home is sold, the bridge loan can be paid off in its entirety, with any unearned interest payments credited to the borrower.
Be warned that using bridge loans in this way—to span the disparity between two separate transactions—can be costly. Bridge loans often come with high fees, so make sure you understand the terms of your loan before signing. Also, be prepared to face the possibility of having to pay the equivalent to three mortgage payments (your current house, new house, and the amount of the loan itself) until your home is sold. Before even considering a bridge loan, speak to your real estate agent. Find out how long homes in your houses’ price range are taking to sell. If the housing market is so slow that you expect your home to remain unsold for many months, a bridge loan may not be such a good idea.
Bridge loans are also commonly used in real estate investing. Individuals interested in investing in real estate property, but who may not have access to conventional loans, can use a bridge loan to make the purchase. Individuals who use bridge loans may be unable to qualify for conventional loans due to credit problems. Thus, many bridge loans are often available through non-traditional lenders, who offer interest rates ranging from 14 to 20 percent. These lenders often also charge ‘points’, or fees, on these loans. One point is one percent of the total loan amount. Because these lenders are not as concerned with credit ratings as traditional lenders, bridge loans are much more accessible, though also much costly.
Bridge loans offer a fast and relatively easy way to receive a fast cash infusion. But they are also saddled with higher than average fees and interest rates. The best advice regarding bridge loans is also perhaps the simplest: don’t use them unless you really have to.
Wednesday, August 16, 2006
Case in Point – Negotiating Mortgage Points before Signing Anything
Are you getting ready to buy a new house, and you’re curious about mortgage points? Mortgage points are fees paid to a broker or lending institution that are linked to your mortgage’s interest rate. In general, the more points you pay, the lower your mortgage’s fixed rate will be. Since the lender is receiving payment up front in a lump sum, the fixed interest rate you pay on your mortgage can be lowered slightly.
One point equals approximately 1 percent of the amount of the loan. For example, for a loan of $200,000, one mortgage point would equal $2,000. Mortgage points are usually paid at closing, in cash. Some buyers borrow money in order to pay points, though this will increase the closing costs and the amount of the loan.
So how much do mortgage points save you in the long run? In most cases, buying mortgage points will only lower your interest rate slightly. Typically, each mortgage point you buy lowers your interest rate by 0.125 percent. So if you have a 6.5 percent rate, and you purchased one mortgage point, it would be lowered to 6.375. You will need to use a mortgage calculator to see how much you save each month. You should also calculate how long it will take before you reach the ‘break even’ point. The break even point is when you recover the cost of purchasing the mortgage points. There are four steps in calculating the break even point:
Calculate the amount of your monthly mortgage payment at the normal interest rate.
Calculate how much your monthly mortgage payment would be if you did purchase one mortgage point.
Subtract the lower payment (results from number 2) from the higher payment (results of number 1).
Divide the amount of one mortgage point by the amount saved each month (results to number 3). The result of this calculation is the number of months needed in order to reach the break even point.
In general, the simplest method in calculating whether you should purchase mortgage points is to decide whether you can afford to make the upfront payment required at closing. If you are interested in purchasing mortgage points, but have to struggle to find payment for them, perhaps they are not the best option for you. Borrowing to pay for mortgage points will not only increase the closing costs, but also the amount of your loan.
You should also keep your specific situation in mind when deciding whether to purchase mortgage points. Are you planning on keeping this mortgage for a short time, or an indefinite period? If you expect to keep your mortgage for a long time, it may be a good idea to purchase mortgage points. The longer you plan to stay in the same house, the more you’ll benefit from the lower interest rate that buying mortgage points at the time of purchase can allow you.
If you’re interested in purchasing mortgage points, be prepared to negotiate before signing. But before you reach the negotiating table, make sure you know what to expect as to the costs of purchasing mortgage points. Check your local newspaper to research current rates. This will give you a good idea of how much it will cost to buy mortgage points.
One of the simplest ways to make purchasing mortgage points relatively painless is to let the seller pay for a portion of them. You will need to discuss the terms of your loan with your broker or lending institution to see if this option is available. If it’s allowable, you can negotiate with the seller to see if they are willing to pay for a portion of your mortgage points. The seller will likely ask to raise the price slightly, but even so, you will be able to move into the house for less.
When speaking to your broker or lending institution, you should ask for points to be quoted to you as a dollar amount, and not as percentage points. This way you will have a clear idea of how much you will be required to pay, if you do decide to buy mortgage points. Having the points available as a dollar amount will also make it easier to negotiate.
One point equals approximately 1 percent of the amount of the loan. For example, for a loan of $200,000, one mortgage point would equal $2,000. Mortgage points are usually paid at closing, in cash. Some buyers borrow money in order to pay points, though this will increase the closing costs and the amount of the loan.
So how much do mortgage points save you in the long run? In most cases, buying mortgage points will only lower your interest rate slightly. Typically, each mortgage point you buy lowers your interest rate by 0.125 percent. So if you have a 6.5 percent rate, and you purchased one mortgage point, it would be lowered to 6.375. You will need to use a mortgage calculator to see how much you save each month. You should also calculate how long it will take before you reach the ‘break even’ point. The break even point is when you recover the cost of purchasing the mortgage points. There are four steps in calculating the break even point:
Calculate the amount of your monthly mortgage payment at the normal interest rate.
Calculate how much your monthly mortgage payment would be if you did purchase one mortgage point.
Subtract the lower payment (results from number 2) from the higher payment (results of number 1).
Divide the amount of one mortgage point by the amount saved each month (results to number 3). The result of this calculation is the number of months needed in order to reach the break even point.
In general, the simplest method in calculating whether you should purchase mortgage points is to decide whether you can afford to make the upfront payment required at closing. If you are interested in purchasing mortgage points, but have to struggle to find payment for them, perhaps they are not the best option for you. Borrowing to pay for mortgage points will not only increase the closing costs, but also the amount of your loan.
You should also keep your specific situation in mind when deciding whether to purchase mortgage points. Are you planning on keeping this mortgage for a short time, or an indefinite period? If you expect to keep your mortgage for a long time, it may be a good idea to purchase mortgage points. The longer you plan to stay in the same house, the more you’ll benefit from the lower interest rate that buying mortgage points at the time of purchase can allow you.
If you’re interested in purchasing mortgage points, be prepared to negotiate before signing. But before you reach the negotiating table, make sure you know what to expect as to the costs of purchasing mortgage points. Check your local newspaper to research current rates. This will give you a good idea of how much it will cost to buy mortgage points.
One of the simplest ways to make purchasing mortgage points relatively painless is to let the seller pay for a portion of them. You will need to discuss the terms of your loan with your broker or lending institution to see if this option is available. If it’s allowable, you can negotiate with the seller to see if they are willing to pay for a portion of your mortgage points. The seller will likely ask to raise the price slightly, but even so, you will be able to move into the house for less.
When speaking to your broker or lending institution, you should ask for points to be quoted to you as a dollar amount, and not as percentage points. This way you will have a clear idea of how much you will be required to pay, if you do decide to buy mortgage points. Having the points available as a dollar amount will also make it easier to negotiate.
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