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Swing Loans: Pros and Cons

Posted January 29, 2010 by Matthew Denton

A tempting offer may either be your ticket to a successful financing or a sign of worse things to come.

Picture this. You’ve already found the right home after months of scouring the most ideal neighborhoods. The big problem is, your current home isn’t getting any prospective buyers. Worse, the deal might not be possible of getting through.

Swing loans or bridge financing can solve this snag. It allows borrowers to use the equity in their current home to purchase a new property that they desire. The amount that the borrower receives is used for the down payment on the new home purchase. These are widely used for commercial real estate purposes but because of its immediate provision of needed financing, it has spread to residential markets as well.

Swing loans are short-term debt obligations. They are paid back much quicker than traditional loans usually when the borrower’s current house is sold. In some cases, the borrower is asked to pay if he secures a refinancing, his financial standing improves, or for some reason, he can finance the purchase of a new home. In general, swing loans have to be repaid in two weeks to 36 months.

The main advantage of swing loans is the purpose of making up for shortfalls in funding a new property purchase. The downside however is that he has to pay higher origination fees along with other interests and fees attached to the loan. That’s why before rushing to your lender, it’s a must to think not twice but many times if a swing loan is right for you.

Here are things to consider when you’re deciding on a swing loan:

1. Review the contract with the lender. You may be paying more for what you’re supposed to.
2. Consider other options too like a Home Equity Loan which typically offers a lower interest rate.
3. It’s better to secure the loan when the home is currently marketed.
4. Check your home’s equity. Obviously, if it’s not enough, you can’t borrow.
5. If you’re only trying to beat a deal deadline, make sure the property’s worth it and you can guarantee the lender that you can pay for swing loan back.
6. If you’re selling your property for quite sometime with no takers, don’t take a swing loan anymore. It’s too dangerous.

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