DSCR vs. No DSCR Loan: What's the Difference?
If you’ve tried acquiring financing for your investment purchase but can’t get a conventional loan or other solution, like a conventional loan, you...
Bryan Capriles
: October 23, 2021
5 min read
Buying a home is a big decision filled with make-or-break decisions. Perhaps one of the biggest decisions is figuring out what type of loan you want to use. Most people assume that they have to go with a traditional loan that can be inflexible in terms of timelines and requirements. However, residential bridge loans offer an appealing alternative.
Here’s what you need to know to determine if this type of loan would work for your situation:
A residential bridge loan is a loan product that allows homeowners to “bridge the gap” between buying a new home and selling their old home. This loan product is designed to be temporary in nature with terms that rarely extend past one year. It is a unique loan product that is usually only offered by specialized lenders.
A residential bridge loan works differently from other types of loans. Bridge loans, also known as swing loans, gap financing, or interim financing, are a short-term financing option that typically come with low monthly payments and some monthly interest before a large fixed repayment date at the end of the year-long loan term. There’s no making equal monthly payments for a long period with bridge financing. Managing the balloon payment shouldn’t be difficult once you have sold your existing home. In fact, in such a competitive seller’s market, most people can cover the loan expenses well before the end of the term, thanks to quick home sales.
Using a bridge loan to purchase a home comes with both pros and cons. Here’s what you need to know to weigh your options:
It can be difficult to determine if a bridge loan is best for your situation — which is why we are here to help! Here’s when you may want to consider using a residential bridge loan:
Securing a residential bridge loan is easy if you know what to do. Here’s everything you need to know:
Residential bridge loans can be beneficial to those looking to buy and sell a home simultaneously. However, they might not be the right option for everyone. If bridge loans aren’t for you, you may want to consider a conventional loan, a home equity loan, a home equity line of credit, or a hard money loan.
Conventional loans are commonly used for buying homes thanks to long terms and low interest rates. For instance, most conventional loans have terms of either 15 or 30 years. If you want the lowest possible interest rates, you should go with a 15-year term. Currently, interest rates for 15-year fixed-rate conventional mortgages average about 2.63% APR.
On the other hand, interest rates for 30-year fixed-rate conventional mortgages average about 3.37% APR. With that said, it’s important to note that your exact interest rate can be either higher or lower than these averages, depending on your finances.
It can be difficult for people with lower credit scores to secure conventional loans since you need a credit score of at least 620 to qualify. With a credit score of 620, you’re not going to get the most favorable interest rates. Instead, you should aim for a credit score above 700 to get lower interest rates and save money on your mortgage costs.
If you already own a home with at least 20% equity, you could also use a home equity loan or a home equity line of credit (HELOC). While these two options may sound like the same thing, there are some key differences to note.
A home equity loan provides you with a lump sum of cash. On the other hand, a home equity line of credit essentially acts as a credit card and allows you to access funds at your disposal. As a result, you will only pay interest on what you borrow rather than having to pay interest on the entire amount — whether you end up using it all or not.
Both home equity loans and home equity lines of credit come with relatively low interest rates since you’re accessing your own equity and are using your home as collateral. The average interest rate for a home equity loan is 5.94%, with an average range between 3.25% and 7.94%, depending on creditworthiness. The average interest rate for a home equity line of credit is 3.88%, with an average range between 1.74% and 6.85%, depending on creditworthiness.
If you’re looking for quick and easy cash in a process similar to that of a bridge loan, there are also hard money loans. Hard money loans don’t have very strict qualification requirements since lenders know they’re able to repossess the asset in question and sell it off to get their money back.
With that said, hard money loans come with the highest interest rates reaching 15%. As a result, hard money loans are only recommended for short-term use to avoid racking up a ton of interest.
If you’re still having trouble deciding whether or not a residential bridge loan is right for you, you may need to turn to the experts. Reach out today to Vaster’s lending experts for tailored advice and expertise.
Sources:
How a Bridge Loan Can Help You Buy Your Next House | NerdWallet
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