People caught between the sale of one property and the purchase of another often use bridge loans. This type of financing is done in the short term and usually through a private lender instead of a bank. These are non-standard loans due to a quick repayment period and high interest rates, but are very useful for borrowers needing a rushed delivery on their funds.
First and foremost, bridge loans are acquired when money is needed sooner rather than later. While the average bank loan can take a while to process, bridge financing provides the borrower with quick access to capital. This benefits any prospective buyer in a competitive market who’s looking to gain an advantage over the other hopeful investors.
These loans are designed for people working with two properties so that the money can either be put towards paying off a first mortgage or used as a down payment for a second home. The same tactic is used with commercial real estate, though often on a larger scale and involving more assets. Commercial investors might also use bridge financing to pay for maintenance or upkeep before a building is ready to be put back on the market. Whether for commercial or residential use, the defining feature of these loans is the limited time frame, with most terms ranging from six months to one year.
When purchasing a home, a short-term loan will help finalize the sale without having to wait on another property to close. Once the other house sells, the loan can be repaid quickly without worrying about a repayment penalty or a protracted dealing with a bank charging interest. With commercial real estate, a property can be used as collateral, eliminating the need to base interest rates on the borrower’s credit. Because bridge loans are usually done through private lenders, the terms and conditions will vary from case to case.
In a general sense, this is the ideal type of lending for someone who flips houses. If a property is finished and ready to hit the market right when another home is becoming available, bridge financing will allow a person to purchase and start flipping a second house while waiting for the first to sell. The expedited financing streamlines the purchasing process without requiring a massive amount of cash up front, and then the borrower is able to repay the loan as soon someone buys the other home.
In short, bridge loans provide a means by which investors can access money quickly before repaying the loan in a similarly timely fashion.