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Bridge Loans are short-term loans designed to span the monetary gap between the closing of your new home and the closing of your current home. As the name implies, this type of loan provides a financing “bridge” for beginning construction of your new home while you sell your current home. Your current home serves as collateral for the bridge loan. Typically, financial institutions charge a slightly higher interest rate for this type of loan, along with processing and administrative fees. Most residential bridge loans are written to last for six months or less. You have to be able to afford to carry the three loan payments: the old mortgage, the new mortgage, and the bridge loan, until the closing on your old home.
Construction Loans provide the financing for the construction of your new home. When you're building a new home, most financial institutions require you to take out a construction loan rather than a conventional mortgage. The construction loan is often blended into a conventional mortgage once the house is finished, in many cases without any additional fees. Under a construction loan, a builder receives "draws" from the bank as various phases of the construction is completed. The final draw comes when the house is completed. The number of draws depends on the bank and how much up front money you put toward the construction of your new home. Most banks charge a set fee for each draw. In addition, some financial institutions charge administration fees and a higher interest rate for constructions loans.
Do You Qualify?
Your Conventional Mortgage is the type of loan you will likely have once your new home is finished. Conventional mortgages typically run 15 or 30 years, with the 15-year mortgage usually carrying a slightly lower interest rate. Most financial institutions will allow you to buy down your interest rate to a lower rate by paying points up front. Each point costs one-hundredth of the amount you are mortgaging. For instance, a point on a $100,000 mortgage would cost you an extra $1,000 as part of your mortgage application fees. Typically, each point that you purchase reduces your interest rate by a quarter of a percent. Conventional wisdom is that buying points is a good investment if you plan on owning your home five or more years. Each point can save you thousands of dollars in interest over the life of your mortgage. Points also are deductible in many instances on your federal income tax return for the year in which you take out your mortgage.
A total of 38,704 new loans for buying a home were approved by major banks in April 2008, compared to about 65,000 being agreed to in April 2007.
The drop in numbers is thought to be as a result of thousands of mortgage deals being withdrawn by banks and building societies and tighter restrictions on loans being offered to new home buyers.
The decline in home purchase loans was offset by a rise in the number of people re-mortgaging their homes. Official figures from the British Bankers Association (BBA) revealed that almost 75,000 home buyers re-mortgaged in April 2008, a rise of 10.7 per cent compared to the same month in 2007.
The majority of the people who re-mortgaged were those coming to the end of a cheap fixed rate deal or discount mortgage, and have been left in a position where they have been forced to move to an arrangement carrying higher monthly repayments. Higher petrol, food, utility and other essential bills have also helped to compound the problem.
Fears have been raised that the high street banks decision to slash the number of home purchase loans will force the property market and the economy in general into a major downturn.
In an attempt to ease the lending cuts, the Bank of England poured £50 billion into the banking sector by swapping UK mortgage loans for gold plated Government bonds which can be used as collateral to raise money to fund financial products such as mortgages.
Despite the move being backed by Alistair Darling, the Chancellor of the Exchequer, on the basis that banks would begin to relax the strict lending policy, figures suggest that the financial institutes are simply looking after their profits rather than supporting the Bank of England and the Government's scheme.
With British banks losing billions of pounds due to the wild lending in the US housing market, sparking the global credit crunch, British consumers are now paying the price through increased mortgage rates and fewer new home loan initiatives.
Global Insight chief economist, Howard Archer, said that house buying in the UK remained under severe pressure from a ‘damaging combination' of tighter lending conditions and stretched affordability.
Archer warned that it seemed ‘certain' that house prices would continue to fall as potential home buyers are left in limbo due to low wage rises and a lack of confidence in property prices. He said, “It is looking highly possible that house prices will suffer double digit falls both this year and in 2009, given serious buyer affordability constraints, limited and often more expensive mortgages available due to ongoing tight lending conditions, a deteriorating economic outlook and reduced prospects for further interest rate cuts in the near term at least.”
Statistics director for the British Bankers Association, David Dooks said, “Pressures on household finances, stalling house prices and tighter lending criteria in response to lower liquidity are all constraining demand for house purchase and equity withdrawal loans, which are both well down on levels last year. In contrast, there is an active re-mortgaging market as people switch lenders to obtain better deals.