Short Term Financing
Short term financing refers to financing that you obtain for usually a year or less. The intent of this financing option is to help you cover your immediate short term financial obligations. Short term financing is often used when people are buying a new home, and have yet to sell their current home. The short term finance will help them to meet the financial obligations of having two mortgages, while also allowing them the expenses associated with purchasing and moving into a new home. The main two types of short term financing loans are bridge loans and HELOC loans. Both have the same goal of supporting homeowners during a transitional period, but they offer different benefits. If you are interested in obtaining short term financing loans, reach out to a Fairfax mortgage broker for more information and help obtaining one.
Bridge loans are specifically designed to bridge the interval between two transactions, typically the buying of one house and the selling of another. This can be a financially draining time if you are having to cover the costs of two houses, so bridge loans step in to help hold you over until your house is sold. Typically this money is used to make a downpayment on your new home, but it can also be used to pay off the mortgage on your existing home. With a bridge loan, your old home is the security on the loan. You will have to pay origination fees and closing costs on the loan, the remaining money is then used for the down payment. It’s important to note that often times the lender that issues you the bridge loan will insist that you also use it for the mortgage on your new home.
Lenders who are considering giving you a bridge loan will assess your financial obligations, including your ability to pay the bridge loan, your mortgage, and any other debts and bills you may have. These factors will play a role in what interest rates you are offered. One of the major benefits of a bridge loan is that you can either repay the loan through regular set payments, or pay it off entirely once you have the finances to do so after the sale of your home. However, there can be prepayment penalties for paying off the loan too early, so you need to be well informed about the parameters of your loan.
Bridge loans are a type of short term financing loans because the loan is usually due between six months to three years after taking out the loan. If your home is not sold during that time period, lenders can sometimes make exceptions on when the loan is due. When negotiating terms of your bridge loan, make sure there is the possibility of renegotiation in the contract, as some lenders won’t allow you to extend the loan otherwise. In some cases, payments on the bridge loan don’t need to be made until the old home is sold, but it does accumulate interest. Not having to make immediate payments on the loan is what makes this option so appealing to some people.
HELOC is a home equity line of credit, or a home equity loan. The loan is set up as a line of credit for a maximum withdrawal, rather than being based on a fixed dollar amount. For example, a standard mortgage will offer you $100,000, which is to be paid out in its entirety at closing. An HELOC will promise to advance you up to $100,000, in an amount and at a time of your choosing. Drawing on this line of credit can be done by writing a check, using a special credit card, or in other ways the lender may offer. You only have to repay the amount of credit, plus interest, that you have withdrawn from your line of credit.
Typically HELOC’s have been used as second mortgages, but more recently an increasing number of them have been used as first mortgages. HELOC’s can save a lot of money in the short term, but it’s not without some risk. HELOC’s are set up in a way that involves a draw period and a repayment period. The draw periods usually last between five to ten years, during which time you are only required to pay interest on the loan. Repayment periods are usually ten to twenty years, during which you must make payments to principal equal to the balance at the end of the draw period divided by the number of months in the repayment period. While these short term financing loans can be very advantageous because you only have to take out the money that you need, some HELOC’s will require you to pay the entirety of the balance at the end of the draw period. If you are unable to do so, you will have to refinance. Make sure you are extremely familiar with the periods of your HELOC to avoid this situation as much as you can.
Which Short Term Loan is Right for You
When deciding which short term loan you wish to pursue, one of the major determining factors is how and when you can pay back the loan. HELCO is a good option if you can afford the payments on it, the old mortgages, the new mortgage, and any other debts obligations that you may have. Unlike bridge loans, HELCO is not based around your old home selling. So whether or not the home sells, the payments on the interest are still due. A bridge loan can be more expensive, but they don’t require you to make payments until your old home has been sold. This makes some people feel more comfortable and see bridge loans as slightly less risky.
Determining exactly which short term loan is right for you can be a daunting task. Consult a Fairfax mortgage broker for their professional opinion, as well as their help in obtaining short term financing loans. They can offer you more information on each type of short term loan, as well as helpfully analyze your specific situation to see which of the short term financing loans is the best fit for you.