Understanding If A Bridge Loan Is The Right Financial Option For You

Understanding A Bridge Loan

A bridge loan is a short term loan that companies and individuals can secure until they are able to obtain permanent financing. Through this means, it will allow the user the ability to meet their current obligations with the use of a positive cash flow. Bridge loans are meant as short term options, up to one year and they come with a high interest rate and usually require some form of collateral such as inventory or real estate.

These loans also go under the name of bridging loan or bridge financing. 

Key Takeaways 

Bridge loans are simple short term financing solutions designed for the purpose of an individual getting permanent financing. 

Bridge loans are short term and not designed to surpass a year. 

These types of loans are generally used for the purpose of real estate. 

Homeowners can use a bridge loan for the purchase of a new home while waiting for their current home to sell. 

How Does A Bridge Loan Work?

Bridge loans are known as gap financing, swing loans and interim financing and help to bridge a gap while other financing is needed but not yet available. Individuals and corporation have the ability to use bridge loans and lenders are able to customize these loans to work for a variety of scenarios. 

Bridge loans are the perfect tool for homeowners looking to buy a home while their current home is on the market. A borrower can use the equity in their current home to use as a down payment for their new home purchase. This can be done as their home is on the market waiting to be sold. This is going to give the homeowner the time they need to get things done and offer a little bit of peace of mind while waiting on that sale. 

It is important to understand that these loans do come with a much higher interest rate than other loans such as a home equity line of credit. And for individuals who still have a mortgage on their home will end up having to pay two payments a month until their home is sold or the mortgage is paid off in full. 

Bridge Loan Examples

In 2016, the Olayan America Corporation was looking to purchase the Sony Building and they recieved a bridge loan from ING Capital. This loan was approved rather quickly and allowed Olayan to purchase the building with dispatch. The loan was used by Olayan America to purchase the building until they were able to secure a long term source of funding. 

Businesses and Bridge Loans

Many businesses will use bridge loans while they are waiting on long term financing, yet they need money for other expenses. Consider a company that has a round of equity that they expect to close in about six months. They may use a bridge loan for adequate capital to be used on rent, payroll, inventory, utilities and other expenses until the funding is finalized.

Using Bridge Loans In Real Estate

Bridge loans are very popular in the real estate industry. If a buyer should find that there is going to be a span of time between the sale of one property and the purchase of another, they may seek out a bridge loan. Most lenders will only offer bridge loans to borrowers who have incredible credit ratings as well as low debt to income ratios. A bridge loan will combine the mortgages of both houses, which will give the buyer a sense of ease of they wait for their house to sell. In many cases, the lender will only offer a bridge loan of 80% of the total combined value of both of the properties, which simply means that the borrower must have a decent amount of home equity or a good deal of cash on hand.

Traditional Loans VS Bridge Loans

For the most part bridge loans offer a quicker application and approval process as opposed to traditional loans. However, due to this convenience they also bring with them a higher interest rates and origination fees and much shorter terms. Many borrowers are typically fine with these terms as they need quick access to the funding. In addition, they know the high interest rate will only be for a short time when they are able to pay it off with funding from a low interest long term loan. Finally, the majority of bridge loans do not feature repayment penalties.

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