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Are you a Chicagoan who is eager to buy your dream home, but you’re still stuck with trying to sell your current house first? If so, you’re not alone – this common predicament affects many home sellers. However, if an ideal home hits the market before you’ve sold your own, a bridge loan can give you the flexibility to act quickly by financing the down payment on your new home.
What Exactly Are Bridge Loans?
A bridge loan is a short-term financing option that is designed to help “bridge the gap” between buying a new home before selling your old one. Here’s how they work. This special loan provides temporary cash to put down a deposit and close on a new house if your current home hasn’t sold yet. This gives you the ability to compete with cash buyers by putting down money upfront from the bridge loan. The loan term is typically around 6-12 months, allowing you some time to find a buyer for your old house and pay back the bridge loan. You will need to make monthly payments and cover fees and higher interest rates during the bridge loan period; but once your current home is sold, you can qualify for a regular long-term mortgage on the new home and pay off the bridge loan.
What are the Benefits of Bridge Loans?
Taking advantage of a bridge loan can offer several potential advantages for Chicago homebuyers. One of these benefits is buying power, as bridge loans provide the capital to put down a deposit and close quickly as soon as you stumble across your forever home. This allows you to act decisively in competitive market situations where cash offers prevail. Another advantage of a bridge loan is that it permits you to lock in your mortgage rate on your new home, which is particularly helpful if rate hikes are on the horizon. Finally, a bridge loan can give you greater flexibility to sell your current home without pressure, so you can hold out for the best buyer to show up with a perfect offer for you.
What are the Downsides of Bridge Loans?
Despite the advantages of bridge loans, they also come with a few drawbacks to consider. First of all, bridge loans come with interest rates that are typically 2-3% higher than conventional mortgages. Closing costs and origination fees normally add at least $3,000, and the extra monthly payments can put additional pressure on your budget during the term of the bridge loan. Also, while the normal 6-12 month term of a bridge loan does give you a window of time to sell your old house, it would be wise to have a backup plan – just in case it takes a little longer for the right buyer to come along, due to changing market situations or other circumstances outside of your control.
With careful planning, bridge loans can be an effective strategy for empowering Chicago homebuyers to gain an edge in competitive markets when they still have a property that they need to get off their hands. Nevertheless, as with any significant financial transaction, it's important to be aware of both the benefits and the risks that are involved with bridge loans. Consult a qualified local mortgage professional who can clearly explain the rates, terms, costs, and risks in the current Chicago market. They will be able to help you make an informed decision as to whether a bridge loan aligns with your current homebuying objectives and financial capabilities.