A bridge loan covers financial gaps for personal and commercial purposes. These loans are functional and most popular in the real estate industry where they can be valuable to buyers who already own a home and decide to purchase a new one with lacking finances. Due to very high interest rates, experts tend to warn against these loans, as they get quite difficult to navigate. Also known as gap finance or swing loans, these credits are a form of short-term financing to bridge the gap. The loans work well until an individual or company secures permanent financing, as they offer instantaneous cash flow for users.
Bridge Loan in Real Estate
If you are selling the existing home while looking to buy a new one and needs finances to fill the gap, you can make use of a bridge loan. A bridge loan can also be used for commercial purposes when the buyer needs money to buy a property that needs renovation. Mostly commercial bridge loans are acquired when the buyer does not qualify for permanent financing. However, there are other reasons to apply these loans, which include unsatisfactory occupancy rates of a property, low credit profile of the borrower, non-availability of immediate permanent financing and so on.
Bridge Loan Rates
Bridge loan rates carry 2% above the average for fixed rate loans, which may vary depending on one’s repayment history and credit scores. To counterbalance the lender’s increased risk levels, a bridge loan includes large final costs. As there are higher risks, these loans have higher rates and increased up-front costs.
Bridge Loan Lenders
Bridge loans are not provided by all banks, finance companies, or mortgage lenders. You often have to look for specialized bridge loan lenders offering short-term loans. Although you can search online and get detailed information about lenders, checking with your local bank is a good starting point.
Benefits of Bridge Loan Financing
Unlike other loans such as mortgages which are geared toward long term expenditure, one of the biggest advantages of bridge loans is that the financing provided by them is short term. Other long term loans require the loan over a long period of time, and as the loan lasts longer, it is likely the borrower might suffer financially which could make repaying difficult. This multiplies the borrower’s financial problems, as penalty fees rise and the borrower further struggles to cover their rising debt. This is not the case with bridge loans which are planned to be paid back in complete by the time a long term form of financing is set.
Additionally, the borrowers have an advantage to either pay the loan before or after the permanent financing is obtained. If the borrower manages to make all the payments in good time, his credit score advances, making him qualify for long term loans, which are otherwise impossible to acquire.
Though bridge loans have certain advantages, they do come with some disadvantages. For instance, as the loan has to be paid in a short time (maximum a year), the payments will be huge. Of course, that won’t be an issue if you have ample money to pay it back, but if you are running on a tight budget, that will be a problem. Before opting for a bridge loan, make sure you weigh the pros and cons.