If you are a business owner or homeowner and want to understand bridge loans, you have come to the right place. However, it is a type of gap between financing arrangements.
With the help of a bridge, loan borrowers can have short-term loans for getting short term requirements. In this article, we will show you how it is vital to understand bridge loans. We will focus on showing you a deep understanding of the bridge loan. However, first, it is crucial to know what a bridge loan is.
What do you mean by bridge loan?
A bridge loan is the type of financing that is used to meet real-time obligations before giving the security to permanent financing. Moreover, when funding is needed, it provides the immediate cash flow. It must get back by some collateral such as real estate property because it comes with relatively high interest. However, to meet certain obligations, loans can be used by companies or individuals.
Bridge loans can easily be arranged with little documentation and in a short period. Therefore, you simply can take a bridge loan to purchase a real estate property. In this way, your property has become the collateral for the loan.
Moreover, with the help of long-term financing, you can meet capitalization needs and pay back the bridge loan. These types of loans are mainly used in real estate to close on a property and retrieve property from foreclosure.
Deeply understanding the bridge loan
Usually, it carries relatively high-interest rates and has a term of six months to three years. It can help borrowers to remove the financial obligations from a previous loan. These loans cannot offer a favorable interest rate but bridge the gap when financing is vital. Moreover, bridge loans are a type of secure debt that is backed by collateral.
However, before a long term loan, bridge loans are helpful in real estate to close on deal quickly. It also provides mortgages with a lower interest rate.
Suppose, when a Homebuyer wants to purchase a new property, then a bridge loan can help to pay off the old mortgage and buy the new property. Lenders offer bridge loans to borrowers with better interest, and the loan is seldom for more than 80 percent of the value of combined properties.
However, in commercial real estate, bridge financing provides flexibility to the borrower to quickly take advantage of short term opportunities. Before lenders consider offering longer-term, lower interest financing, bridge loans help to buy a property that needs significant renovations or upgrades.
Bridge loans are helpful in commercial financing by providing all the businesses with the inventory or other assets to return a loan to make repairs or to buy more inventory before their sales goals. Moreover, they also use the bridge loan while waiting for new investment to come from investors. Lastly, these types of loans will provide you with the flexibility to buy your dream house.
Different types of bridge loans
In this article, we are going to discuss the four types of bridge loans, such as second charge bridging loan, the first charge bridging loan, closed bridging loan and open bridging loan.
1. Second charge bridging loan
After the first charge lender, the lender takes the second charge for a second charge bridging loan. The second charge bridging loan is only for a short period that is for less than 12 months.
These types of loans attract a higher interest rate and carry a higher risk of default. After all the liabilities are approved to the first charge bridging loan lenders, second charge loan lenders will start collecting payments from the clients. However, as the first charge lender, the bridging lender for a second charge loan has the same repossession rights.
2. First charge bridging loan
This type of loan offers the lenders a first charge over the property. The first charge bridge loan lender will receive its money before other lenders due to the default. As compared to second charge bridging loans, first charge bridging loans attract lower interest rates.
3. Closed bridging loan
This type of loan is available in an already determined time frame that agrees by both parties. Moreover, most lenders like to use the closed bridging loan because it gives them a higher degree of certainty about the loan repayment. As compared to open bridging loans, it attracts lower interest rates.
4. Open bridging loan
At the initial enquiry, the repayment method of an open bridging loan is undetermined. Moreover, there is no fixed date for a payoff. Most bridging companies deduct the loan interest from the loan advance to ensure the security of their funds. Borrowers not ready for their finance, mostly prefer these types of loans. The lenders charge a higher interest rate for open bridging loans due to the uncertainty of loan repayment.
Example of a bridge loan
In 2016, when Olayan America took out a bridge loan from ING capital, to purchase the Sony building, the bridge loan was approved very quickly and helped the American company crack the deal on the Sony building.
How a bridge loan is helpful for businesses
To cover expenses in the interim, nowadays, businesses turn to bridge loans. Imagine a company is doing a round of financing to close in six months. These businesses also help to use a bridge loan to provide working capital to cover it’s inventory costs, utilities, payroll and rent.
Difference between traditional loans and bridge loans
There is a big difference between traditional loans and bridge loans. As compared to traditional loans, bridge loans have a faster application, funding process and approval. However, the bridge loans have relatively short terms and high-interest rate.
Most of the borrowers accept bridge loans because it requires fast and convenient access to funds. It is a short term and plans to pay it off with low interest and long term financing. Moreover, most bridge loans do not offer repayment penalties.
How does bridge loan works
In the real estate industry, bridge loans help to make the down payment for a new house. A bridge loan is helpful for homeowners as well as for the companies and business owners. If you are a homeowner looking to buy the house, then you have the two options to purchase the home.
Including a contingency in the contract for the contract is the option to purchase a house. However, including contingency in the agreement means that you will only buy the new home after the sale of your old house. If other buyers are ready to buy the house instantly, then some sellers reject this first option.
Before the sale of the first house, getting a loan to pay a down payment for the house is the second option to purchase a house. You can use your old house as collateral and take a bridge loan to buy a new home. Afterward, the bridge loan will help you pay the down payment and cover the loan costs. Most of the time, lenders offer approximately 80% of the combined value of both the houses.
Companies and business owners can also use a bridge loan to finance working capital and cover long-term financing expenses. A bridge loan helps these companies to cover their expenses such as payroll, utility bills, inventory costs and rent.
These types of loans also help a distressed business to ensure the smooth running of a business. Moreover, with the help of bridge loans, lenders can take a position in the company to protect their interests.
Benefits of a bridge loan
One of the best advantages of bridge loans is that it allows you to secure opportunities. The bridge loan will help a homeowner to buy a new house by including a contingency contract after selling their old home.
However, some homeowners are not comfortable with such an agreement and might end up selling the property. As you wait for the sale of the other house, with a bridge loan, you can pay a down payment for the home.
It takes less time than a traditional loan for qualifying. This type of loan offers a speedy process that will give you the convenience of buying a new home. On the other hand, long waiting time for traditional loans can force you to rent an apartment.
Additionally, depending on the loan agreements, the bridge loans offer flexible payment terms. Before or after selling the old property or securing long-term financing, you can choose to pay off the loans.
Drawbacks of a bridge loan
While waiting for your old house’s sale, taking a bridge loan will leave you with the burden of paying two mortgages. The bridge loan lenders will foreclose on the home and leave you in financial stress if you default on your loan obligations, then you were before taking the bridge loan. Additionally, due to the financial stress and foreclose on the house will leave you with no home.
Bridge loans are costly for the short period of financing because it includes high-interest rates and fees such as lender legal fees, valuation payments and front end charges. Moreover, some of the lenders will force you to take a mortgage that results in limiting your abilities to ensure mortgage rates around different companies.
Here are some average fees for bridge loans
However, among lenders, the rates and interest rates fluctuate all the time. When the loan is paid upon the property, it carries no payments for the first four months. There is also a fluctuation in different types of fees.
The appraisal fees are 4.75%, and the administration fees are 8.5% based on the $10,000 loan. Moreover, among others, some of the fees charged at a higher rate.
However, bridge loans are more costly than home equity loans, but bridge loans offer more opportunities for homeowners than home equity loans. Additionally, if the home is on the market, many lenders do not like to take home equity loans.
In this, we have provided you with the best guide for a better understanding of the bridge loan. These types of loans are beneficial for both homeowners and businesses. If you want to purchase a new house but don’t have the cash, You can fund the down payment to buy a house in two simple ways. The first simple way is that you may decide to take a bridge loan and secondly, you may choose to take out a home equity loan.
In such cases, before buying a new house, a bridge loan is safer and creates financial sense. Before purchasing a new home, sell your previous house. If your existing house does not sell for some time, ask yourself what your next step should be. If your former home doesn’t sell, then you are financially supporting two residents. So it will get difficult to achieve your goals.
Moreover, the main advantage of bridge loans is that it avoids a contingent process if your house is sold or you plan to sell your home. Make and plan to sell your previous home and take a bridge loan to buy your dream house.