If you’re keen to invest in a luxury home, a common problem you may face is securing the funds to afford your venture.
A possible solution in this scenario is to secure the financing with a bridge loan. This article will discuss everything you need to know about bridge loans for luxury homes.
What Are Bridge Loans?
Bridge loans are short-term loans that allow you to purchase a new property while waiting or an existing one to sell. That means you can “bridge” the gap between selling one property and buying another.
The idea of Arizona bridge finance is that it’s a quick, temporary solution, and you’ll need to be able to pay it off quickly (usually a year, but the faster, the better, as bridge loans have high interest rates). The loan is secured by the equity in the existing property.
You may find a bridge loan particularly beneficial if you’re looking to buy a luxury property in an area with competitive real estate, where you need to move quickly to prevent others from snapping up a deal before you can.
Having access to a bridge loan means you can make an offer quickly, and the fact that your offer is non-contingent should work in your favor.
Why Use a Bridge Loan for Luxury Property?
Bridge loans aren’t your only option when investing in luxury property, but they can be particularly helpful for the following reasons:
- They provide quick access to funding (within days), so you can beat your competitors and secure a deal
- They allow you to buy before selling the existing property, taking the pressure off somewhat and preventing you from missing out on a property you have your eye on.
- You can make a non-contingent offer on a home, making you more attractive to the seller.
- In terms of how you use the loan, the choice is yours. For instance, you might take out the loan to finance the renovations on a luxury home, not the property itself.
How to Qualify for a Bridge Loan
When you’re deciding whether or not a bridge loan is right for you, it’s good to be aware of the qualifications you will need for this financing option.
The minor details can vary from one lender to the next, but these are some of the common requirements:
Sufficient Equity
You’ll need to have a significant amount of equity in your current property to qualify for a bridge loan for a luxury home. Your lender may check that you have at least 30% equity in the property in question.
Exit Strategy
Remember, bridge loans typically need to be paid off within one year, and your lender will want to see that you have a clear exit strategy for repaying the loan. You’ll probably need to demonstrate your plans to sell your existing property or secure a longer-term mortgage to refinance the bridge loan after purchasing the luxury property.
Debt-to-Income Ratio
Finally, the lender will want to check that you have a lower debt-to-income ratio, showing that you can comfortably take on the additional debt alongside your existing obligations.
Interest Rates & Fees for Bridge Loans for Luxury Homes?
Before rounding up this article, let’s take a moment to focus on one of the most important things to know about bridge loans: their interest rates.
Compared to traditional mortgages, bridge loans typically have higher interest rates, and the reason for this is that they provide the convenience of much faster approval and they’re only typically intended for short-term borrowing. The increased risk associated with a bridge loan also contributes to its higher interest rates.
It’s common to see interest rates ranging from 9 to 12 percent, sometimes even higher, for bridge loans. Not all bridge loans have the same interest rates—as with any loan, this depends on the loan’s fine details and the lender themselves.
Aside from these interest rates, you should also be aware of the other fees and costs associated with bridge loans. Most lenders will charge you a fee for origination and appraisal, and there will probably also be broker fees and closing costs. This is to be expected, but make sure you understand and are comfortable with the terms and conditions of a bridge loan before you sign on the dotted line.
Final Word
You should now have a basic understanding of bridge loans for luxury homes, including what they are, their benefits for this purpose, how to qualify for this loan type, and the associated fees and interest rates.
While a bridge loan can be a great financing solution, make sure to consider all your options before you put your plans into action. Ultimately, you need to make the right choice for your specific situation, and that will probably mean comparing several lending options side-by-side.
