Bridge Loan – Understanding How a Bridge Loan Works

A bridge loan is a short-term loan cut across larger or longer-term financing, thereby making the larger loan pending for a period until the previous obligation is obtained.  However, bridge loans are short-term and as such, they are with relatively high-interest rates and backed with some form of collateral e.g. inventory or real estate.

A bridge loan otherwise known as bridge financing is a type of loan that allows users to meet current obligations with immediate cash flow.

Bridge Loan - Understanding How a Bridge Loan Works

WHAT YOU SHOULD KNOW

  • In a bridge loan, loans are used till it is secured permanently or removes an existing obligation.
  • Do you know that bridge loans are short term, eventually up to one year?
  • Do you know this type of loan is obtainable for real estate project?
  • A bridge loan is used by homeowners often to. Purchase a new home while they wait for their current home to sell.

How a Bridge Loan Works

Bridge loans are as well know as swing loans. Bridging financing or gap financing according to its function by supplying when. Financing is needed but not yet available. This can be used by individuals and corporations. This can be customized for many different solutions.

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Homeowners often make use of bridge loans. To purchase a new home while they wait for their current home to sell. Borrowers equally use as a down payment on the purchase of a new home while. They wait for their current home to sell.

Nevertheless, the pro part of this loan is that it provides an immediate cash flow but is characterized by a higher interest rate other than a traditional loan. This allows you to combine mortgage and bridge, but you will be faced with making two payments; one for the bridge loan and the other for the mortgage till the old home is sold.

How businesses relate with Bridge loans

Businesses proceed with bridge loans because of immediate cash flow in order to cover their expenses while they wait for long-term financing. A company or business may have obtained equity financing which is expected to round off in the next five months, bridge loan can help them solve the minor expenses such as inventory payroll, rent, utilities, and other expenses till they round up the funding.

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Use of Bridge Loans in Real Estate

Bridge loans are obtainable for real estate development. Assuming a buyer cuts across a need to purchase more property and sell another property, a bridge loan can pop in. Moreover, real estate bridge loans are offered to borrowers with excellent credit ratings and low debt-to-income ratios. Bridge loans support and offer flexibility in the mortgage as the buyer waits for their old house to sell. Real estate bridge loans are offered 80% worth of the combined value of the two properties. This means that borrower must have significant home equity over the original property or sufficient cash savings at hand.

PROS

Bridge loans are typically a fast way to source cash because of its fast application, approval, and funding process. It is a short-term loan despite it comes with a higher interest rate and large origination fees. It supports immediate cash flow especially when the borrowers are in a financial shortage.  Furthermore, most bridge loans do not have repayment penalties.

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