What is a bridge loan? A bridge loan is a type of financing used to meet current obligations by providing immediate cash flow until a person or company is able to secure permanent financing or until the existing obligation has been removed. It is a short term loan, up to a year, with higher interest rates compared to the bank rates and is usually backed by some form of collateral such as real estate or inventory.
The reason why some property buyers takes out a bridge loan is buy another home before selling their existing house. Usually, a bridge loan is used to pay the down payment for the new home before their existing house could be sold or while waiting for a buyer to come along. Preferably, the existing house should be sold off first before buying a new home.
Taking a bridge loan is fast, sometimes approved in the same day, and the loan could be funded within a week. A bridge loan convenient but is not without risk. What happens if there is no buyer and there is the fear that the house would not be sold. Those thinking of taking a bridge loan should consult a trusted financial advisor before committing to a bridge loan. But many are attracted to the benefits that bridge loans offer i.e. the loans allow the borrowers to buy their new house without a contingency to sell.
When a real estate investor’s needs could not be met by the traditional banks, the investor will turn to the private money lenders to provide the much needed loan. The loan has a shorter term than a traditional loan, usually between 6 months to a year period. The rates and terms are more flexible and the loan can be customized to tailor both the borrower and the lender.
Pros of bridge loans outweigh the cons:
- Bridge loan lenders can provide much faster financing than banks that offer bridge loans.
- Save the borrower from the hassle and cost of having to move home twice.
- With the bridge loan, the borrower is able to pay the down payment for the new home.
- The bridge loan provide the funds to borrowers denied by the traditional banks.
- The private money lenders have no problem providing loans against property currently listed on the market.
- The lender only need to ensure the borrower is able to make the necessary payments on the loan. Plus, the sale of the existing property serves as the repayment for the borrowed loan amount.
- Higher interest rates
- Higher transaction costs