A bridge loan provides the real estate investor with cash to use temporarily until a more permanent financing source comes through. Bridge financing allows individuals or companies to invest more in real estate, buying more properties than they could if they rely on more popular financing forms. A bridge loan gives more time to the investor to shop around for a suitable mortgage instead of feeling forced to take the first commercial mortgage for which they qualify.
Various factors determine the amount a person or company can borrow as a bridge loan and the interest and fees they pay. Usually, a bridge loan is not more than 80% of the total property value. Interest rates under this vary from the low single digits to mid-double digits. For borrowers, the fees commonly included in bridge loans include an appraisal fee and origination fee.
Usually, the bridge loan payment is due in full by the end of the term. Few of the loan programs offer the opportunity for borrowers to extend the loan term if required. For example, a borrower with a six-month bridge loan may not successfully line up a business mortgage by the end of the six months. If so, they can request an extension, meaning it will take longer for the investors to regain their earnings and investment.
While deposit and a higher rate of interest offer private investors some protection should a borrower default on a bridge loan, it is also a good idea for investors to do their due diligence before choosing to lend money.
Benefits Of A Bridge Loan
Bridge loans help the investor who offers the loan and borrowers who apply for the loan and receive them. Few advantages of a bridge loan are explained below.
- Diversity: The Bridge loan allows the investor to diversify their portfolios. In addition to investing in real estate, bonds, and stocks, bridge loans open the stream for another income.
- Short turnaround: A bridge loan is an ideal method when the borrower needs immediate cash. The loans are well-suited for those struggling with cash flow and need to get them through until they get approval for a second loan or make a significant sale. Since bridge loans have a short term, lasting less than one year, investors who participate in bridge funding programs can see a return on their investment earlier rather than later.
- Opportunities for real estate investors: Getting a bridge loan means that a real estate investor can take advantage of the opportunity they would otherwise have to pass over. For example, a borrower can use the funds to purchase one property that becomes available while they are selling another without using an emergency clause or waiting for the first property’s sale to go through.
- A higher rate of return: Because of funding’s shorter-term and urgent nature, bridge loans typically have higher interest rates than regular commercial mortgages.
1031 Xchange offers a marketplace of fully vetted real estate offerings. Check out some high-performing 1031 properties in the 1031 exchange properties list published in the property section of the website.