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What is a Bridge Loan?

The world of loans and money lenders can be confusing especially for those without knowledge of the different types of loans available and what each type of loan is best suited for. Some are familiar with common loans, such as traditional mortgages and, of course, personal loans. But, there are several other options a borrower might select, depending upon their purpose for seeking the funding. For example, a bridge loan can be an ideal choice for those needing cash fast in a real estate transaction.

In fact, bridge loans are often used by real estate investors and those interested in flipping houses. They can also be used by individuals who need cash in the intermittent period between selling their home and purchasing another. Bridge loans can be used to finance other projects as well. But, before selecting a money lender and applying for a bridge loan, individuals should consider first familiarizing themselves with the pros and cons of bridge loans and determine if a bridge loan is the best suited lending option for them.

What are bridge loans?

Bridge loans can best be described as short-term financing. For example, someone who needs cash in a short amount of time and also plans to pay off the loan within a short period of time might acquire a bridge loan from a money lender. And, like most loans, bridge loans also have certain costs so they may not be feasible for every financial situation.

They are used quite often for real estate transactions in which a real estate investor is interested in purchasing and then selling a piece of property within a few months to a year. And, house flippers often seek bridge loans to also finance their renovation projects.

Bridge loans typically have a repayment period of six months to three years. Real estate investors who use a bridge loan to finance a property purchase could then repay the loan once the property is sold. 

Bridge loan interest rates

One of the most important things to remember about bridge loans is that the interest rates are typically higher than the interest rates associated with conventional loans. And, like conventional loans, bridge loans also have closing costs and origination fees. 

Bridge loans pros and cons

Borrowers should consider the following before seeking a money lender for a bridge loan so that they are better prepared to make an informed decision.

Pros

  • Bridge loans can be quicker to close than conventional mortgages. This can be beneficial for time-sensitive real estate transactions or for those who wish to purchase a new home before they are ready to sell their current home.
  • Bridge loans offer a potential financial solution for individuals currently struggling with a lack of funds.
  • Bridge loans offer more flexibility with the loan terms that may not be available with other lending products. 
  • Bridge loans may exclude a pre-payment penalty, offering real estate investors the opportunity to retain more of potential profits after the sale of their property. 

Cons

  • Bridge loans typically have higher interest rates than conventional loans.
  • Bridge loans can require a borrower to have up to 20% equity in their home to secure the loan.
  • In the event that a borrower has trouble selling the home and is unable to repay the bridge loan, the money lender may be able to foreclose the property that was used to secure the loan.

Who offers bridge loans?

Many different types of money lenders will offer bridge loans. These include banks, credit unions, and hard money lenders. When selecting a money lender, prospective borrowers should try to take the time to research different lenders and financial institutions, as well as read the terms and conditions associated with each one’s loan offerings. Reading reviews that detail a lender’s customer service, fees, and overall performance can also help borrowers make an informed decision.

In conclusion

Bridge loans can be a good option for real estate investments, flipping houses, or even just obtaining cash faster in between moving or helping finance a project. But, borrowers should consider whether they are adequately prepared to pay back the bridge loan within the term limit, or it could be a risky endeavor.

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The above is provided as a convenience and for informational purposes only; it does not constitute an endorsement or an approval by Kiavi of any of the products, services or opinions of the corporation or organization or individual. The information provided does not, and is not intended to, constitute legal, tax, or investment advice. Kiavi bears no responsibility for the accuracy, legality, or content of any external content sources.