Mortgage bridge loans have become an important part of property purchasing in a slow housing market. In an up market, people do not have to worry about purchasing real estate contingent on the sale of existing property owned. In a slow market, it becomes necessary to have some bridge financing. Those in need of a mortgage bridge loan need to know key terms associated with these loans including mortgage points, prepayment penalties and mortgage closing costs.
Swing loan or gap financing
Swing loan and gap financing are terms used synonymously with bridge loan. These are short-term mortgage loans used by homeowners selling one property and purchasing another. These loans allow the homeowner to use their current property as collateral to pay off an existing mortgage or as a down payment on a new home.
In mortgage bridge loans, a property owner may be charged as much as two mortgage points for the use of the loan. Mortgage points are equal to one percent of the loan amount.
Mortgage closing costs
When considering a bridge loan, individuals should strive to understand closing costs. These are the costs of establishing the loan, including application fees, appraisal fees, title search costs and more.
Prepayment penalties may be placed onto a bridge loan. This type of penalty charge a sizable fee when the loan is paid off early, ahead of regularly scheduled payments. When applying for bridge loans, investors should find out if prepayment penalties are included, particularly because many homeowners will want to close out loans before the end of the loan term.
Proceeds from bridge loans are often used as a down payment toward the purchase of another house. A down payment is a lump sum payment on the property made by the buyer.
Home equity line of credit (HELOC)
Due to the costs and risks associated with bridge loans, many experts recommend that borrowers consider a home equity line of credit instead. This type of loan offers a much lower interest rate and less risk.