You know why a bridge is used? It is a device that allows people or vehicles to cross an obstacle such as a river or canal or railway etc. In short, it bridges the gap. A bridge loan is just that. It is a short-term loan that allows the borrower to fill the gap that exists between the lack of money and a payment. Here, the borrower can get a short-term loan to meet his or her short-term money requirements.
As Wikipedia explains it – “A bridge loan is interim financing for an individual or business until permanent financing or the next stage of financing is obtained. Money from the new financing is generally used to “take out” (i.e. to pay back) the bridge loan, as well as other capitalization needs.”
Here are the main characteristics of a bridge loan –
These are temporary and short-term in nature.
Often used in commercial real estate purchases to take benefit of short-term opportunity to secure a long-term loan.
It is similar to hard money loans and considered a non-standard manner of borrowing. They are usually the last resort option.
Typical tenure remains at 12 months and may be extended in specific circumstances.
It can be borrowed as a closed loan with a fixed payback date. Or it can be borrowed as an open loan that does not have a fixed payoff date and continues until a fixed date arrives.
A small example when a bridge loan will be needed –
A person who is looking for an upgrade wants to buy a bigger house. He got a great deal on a house but unfortunately, he has not sold the current home. By taking a bridge loan, the person can put the old house as collateral to the lender and get some cash to pay for the down payment and installments of the bigger house. He bridged the gap between the time it took to sell the old property and buying the new one.
The Pros of a Bridge Loan
Even though a bridge loan is a non-standard loan, it can be really helpful in some pressing conditions. Some of the pros include –
To get help for investment in multifamily properties – Banks prefer a stable market property but if you are investing in an underdeveloped property, getting a loan is not easy.
Option to Choose Repayment Terms – a bridge loan allows you to choose repayment option that is comfortable for you. This can mean opting for a farther payoff date can help you improve your credit score.
Fewer Documentations – There is not much documentation revolving around bridge loans so it allows for quicker settlements.
The Cons of a Bridge Loan
Non-standard Structure – The terms and conditions differ from lender to lender so you will have to do some research.
Higher Interest Rates – You pay for the convenience of quick approval and reduced documentation with higher interest rates.
The market is Unstable – The real estate market is unstable. It may happen that you would not get any buyer for your old house then you will have to live with two mortgage payments.