Bridging loans provide a solid option for people stuck between properties. If you find yourself waiting on selling a property, but wishing to purchase a new one in the meantime, your only option may be such a loan. Without enough equity in your first property, you may find yourself cash starved to come up with the funds to put down on the second property. These loans provide the funds needed quickly so you can close on the second property in due haste. Once you sell the original property, you use the funds from that one to pay off the loan and to get your second mortgage established.
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Bridging loans gives a purchaser extra time to deal with their older property. Sometimes, they think they have a solid offer for their original property and move to get the financing started on the second property. However, the potential purchaser of the original property encounters problems and they cannot complete the sale as anticipated. That leaves the owner between properties. They financially obligated themselves on the second property before the first one completely settled. Now, the first one is in limbo, yet they still have to fund the second property. With such a loan, the owner has the time to get rid of the original property without losing the second.
Bridging loans must have backing. The borrower must pledge assets equal to the value of the loan in case they cannot repay on time. If they are stuck between properties, the loan's collateral is usually the second property. If they use the loan to secure an auction property, the auction property is collateral. For businesses in need of quick cash, they often use business property as collateral. Non-real estate property can also be collateral. In all cases, if the borrower fails to repay the loan, the collateral may be forfeit to the loan company. That is one reason why you should consider the possible consequences of these loans before committing.
Another reason to consider carefully the consequences of bridging loans is the expense. These loans come with good-sized fees to get the loan started. After this, each month, the borrower must pay the interest on the loan, which runs upwards of 1% or more depending on the size of loan. When you close the loan, some companies charge a fee for the completion of transaction. Before you sign any papers, make sure you understand all charges and fees associated with the loan.
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