Swing Loans Explained

Real estate transactions can be very expensive. That is why there are plenty of loan options available. One option is a swing loan, which is also referred to as a bridge loan. This is a loan that can be useful for certain people in some situations. Learn more about how a swing loan works below, and be sure to reach out to a real estate professional who can help you understand the benefits and drawbacks of each individual option.

What is a Swing Loan?

A swing loan, which is also called a bridge loan, is a specific type of loan that is frequently used to help you transition from one situation to another. Even though you may have to take out a loan to purchase the property, you may also need some extra funding to help with your moving expenses. Or, if you have to stay in another location in between your prior residence and your new one, you might incur some additional expenses. A swing loan is a short-term loan that can help with that.

A swing loan is a specific source of funding or capital that you can also use to cover your expenses until you secure permanent financing for your new home. Or, you may have an existing debt obligation that you need to take care of. In general, these are loans that will last approximately six months to one year; however, they can be customized to meet your needs, just like other types of loans.

It is true that most people would prefer to wait until their house is under contract before placing an offer on a new one; however, there are some situations where this might not be possible. Everyone is on a slightly different timeline, and waiting that long might not work for you. For example, there could be a situation where you need to move for work right now. Or, there could be family situations that require you to vacate your current house quickly to move somewhere else. With the market as hot as it is right now, you might believe that it is better to purchase a new property now and then sell your current one down the road. A bridge loan can help you with that.

If you aren’t able to sell your house quickly enough before you can purchase a new one, a swing loan can help you cover the expenses, providing you with the funds you need to move forward on the purchase of your new home before you can sell your current one.

A bridge loan can give you access to additional money that you can use to purchase property, allowing you to tap into an additional source of capital until your current home sells.

How Does a Swing Loan Work?

What is a bridge loan or swing loan? If you are in a tight spot, and you need to make a sudden change to where you live, then a swing loan can help you. Similar to other loans, the terms and conditions of a swing loan can vary significantly from person to person. You can customize the terms of the loan to meet your needs. 

In some situations, you might use a swing loan to pay off your current mortgage, while other types of swing loans are simply taken out in concurrence with your current mortgage. Furthermore, there are some situations where you might need to make a monthly payment on your swing loan, and there are other situations where you might not have to make a payment until you sell your current house.

In general, there are two separate categories of options to consider if you are interested in a swing loan. They include:

  • Second mortgage: You might be interested in using a swing loan to act as a second mortgage for a short amount of time. Essentially, you will use a swing loan to put a down payment on your new house without having to sell your current house first. This means that you might not have to make offers on new houses that are contingent on you selling your current one.
  • Pay off the first mortgage: You can use a bridge loan to pay off your current mortgage before using the remaining money to put down a new down payment on your next house. This means that you do not have two mortgages at the same time, as you can use your bridge loan to pay off the first one.

The exact terms and conditions will vary depending on the category of bridge loan you choose. Some of the most common terms and conditions of a bridge loan include:

  • The vast majority of bridge loans will last between six months and a year.
  • Most swing loans will be secured using your current house as collateral. That way, you can qualify for a lower interest rate on the loan.
  • In general, the interest rate on a swing loan will be slightly higher than the current prime rate.

As you go through the process of applying for a bridge loan, you will probably notice that the process is the same as applying for a mortgage. For example, your credit score, debt-to-income ratio, and your loan-to-value ratio will impact whether you will be approved for your swing loan. This means that if you do not have at least 20% equity in your current house, you may find it difficult to apply for a swing loan. That is why it is important to work with a trained professional who can walk you through the process and put you in the best position possible to be successful.

Swing Loan Advantages and Disadvantages

Before you decide if a swing loan is right for you, it is important to think about the benefits and drawbacks. There are a lot of benefits that come with applying for a swing loan. Some of the biggest benefits include:

  • The opportunity to purchase a new house before you sell your current one.
  • The freedom to make an offer on a house without having to place a sale contingency on any offer that you made. This can make it easier for you to get an offer accepted in a hot market.
  • Additional funds that you can use if you have to transition suddenly. It is particularly helpful if you have to move immediately for a job.
  • If there is a lot of uncertainty in your life right now, you can use a swing loan as a source of capital to make the process easier.
  • With certain swing loans, you may not have to make any monthly payments for the first few months.
  • Depending on your financial situation, you may be able to defer payments entirely until you sell your current property.

Because there are a lot of benefits that come with applying for a swing loan, they have become a popular option for certain people in some cases. However, it is important to think about the drawbacks of a swing loan as well. Some of the most important drawbacks that you should keep in mind include:

  • Typically, a swing loan has a higher interest rate than a conventional mortgage.
  • Because a lot of people use a swing loan in conjunction with another mortgage, it is virtually required for someone to have 20% equity in their current house before a lender will give them a swing loan.
  • In most cases, you can only get a swing loan if you are in the process of applying for a new mortgage.
  • With a swing loan, you may have to deal with two mortgages at the same time, which can be stressful for some people.
  • The financial burden can be a lot for some people to take on, and there are some people who may fall into foreclosure on their first property.

Because you are taking on additional debt by taking out a swing loan, it is critical to make sure that you are in a stable financial situation and can handle two large loans at the same time for a short while. It is important to understand that there are a few alternatives to consider as well. They include:

  • Taking out a home equity loan. You can borrow against the equity in your home, using it to cover your expenses or put a second down payment on a house.
  • Using a home equity line of credit. This could help you secure a better interest rate and lower closing costs, but you might face some prepayment fees if you decide to pay off your home equity line of credit early.
  • Consider a personal loan. You can secure this loan with other personal assets to get a lower interest rate, helping you avoid using your house as collateral, if you choose.

Because there are so many options on the table, it is important to work with a professional who can help you.

Source Capital Funding Can Help With Your Swing Loan

If you are looking for hard money borrowers who can help you with your bridge loan mortgage, we can help you. At Source Capital Funding, we provide you with access to a hard money broker who can provide a wide variety of loans, including fix and flip loans. A residential hard money lender can help you get through difficult times, so contact us today to speak to a member of our team.

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