There are several different available loan options. Some are long-term-loans while others are short-term loans.
So just before you apply for any type of loan, you should find out if it’s a long term or a short term loan. Find out how it works, how you can make the most of it and the downside of obtaining the loan.
When you need a short-term loan that guarantees quick access to funds, one of the best options is the bridge loan. Another quick access to funding is an emergency fund.
So what exactly is a bridge loan and how does it work?
What Does A Bridge Loan Mean?
A bridge loan is a type of a short-term loan you can use either as an individual or a company until you get permanent financing or do away with an existing obligation.
Bridge loan lets the borrower meet current needs by offering instant cash flow. This loan isn’t a long-term loan, they only last for a period of one year.
Bridge loans come with fairly high-interest rates. They often require some kind of collateral like an inventory or real estate.
Here’s how the loan works:
Otherwise referred to as interim financing, swing loans, or gap financing, as the name suggests is often used by borrowers to bridge the gap when funds are required and none is readily available.
Individuals and companies obtain and use bridge loan. So lenders are known to customize the loan for several different circumstances.
The loan offers instant cash flow and a high-interest rates and as I mentioned earlier, bridge loans require collateral.
Why Do Companies Use Bridge Loans?
Companies who use bridge loans often opt for it when they are expecting long-term financing but require some money to pay up costs temporarily.
For instance, a business can obtain a bridge loan if it’s carrying out a round of equity financing that is expected to end in a few months’ time such as three months or even more.
The company can use the bridge loan to finance working capital. This includes financing its utilities, payroll, rent, inventory costs and other related ones up until the round of funding is successful.
How Real Estate Buyers Use Bridge Loans
While it is not as common as other types of loans, bridge loans are sometimes mentioned in the real estate industry.
For instance, if a potential home buyer is caught between buying a home and selling another property, he or she may resolve to obtain a bridge loan.
In most cases, lenders only provide real estate bridge loans to individuals with excellent credit scores.
Another thing lenders consider is a low debt-to-income ratio. One of the key benefits of real estate bridge loans is that they can combine the mortgages of two homes into one.
This will give the home buyer the opportunity to sit back, relax and heave a sigh of relax while waiting for their old house to sell.
Nonetheless, in many cases, lenders are known for granting real estate bridge loans that are worth up to 80% of the joint value of the two homes.
This indicates that the borrower must have substantial home equity in the initial property or ample cash savings available.
A quick guide about LendingTree mortgage here.
See the connection between your mortgage and credit score here.
Learn more about the significant things to consider before buying our first home here.
Bridge Loans Compared To Traditional Loans
Compared to traditional loans, bridge loans usually have a quicker application, authorization and funding process.
Nonetheless, to make up for convenience, bridge loans have a tendency to have fairly short terms. The loan also has high origination fee as well as high-interest rates.
By and large, borrowers accept bridge loan terms. This is as a result of the fact that they need fast and less stressful access to instant funds.
Borrowers are often ready to pay the high interest rates because they are aware that it’s a short-term loan. So they usually plan to pay it off with low-interest long-term loans as soon as possible.
Read more about the modern rules of loan refinancing here.
One other important aspects of bridge loans are that they don’t have re-payment penalties.
Learn more about installment loans here.
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A beginner’s guide to FHA home loans here.