Bridge loan, also called “gap financing” or “swing loans” is a short term loan that lasts to a year. It is used by an individual or a company to secure financing and eliminate their current obligation. It allows the user to meet the existing obligation by providing instant cash flow. These loans are popular in markets like real estate market, where it is fundamental to customers who already own a home and want to buy a new one. In businesses, this loan offers positive cash flows while the business closes on long-term financing.
Although this kind of loan has solid benefits, it also comes with the price. It somewhat has high-interest rates and is usually backed by a form of collateral like real estate or inventory from a business. If you use a commercial property as a collateral, it’s commonly called a commercial bridge loan.
How does Bridge Loan work?
There are some lenders who require the user to meet a minimum score credit or small debt to income ratio level. Somehow, bridge loan lenders don’t have hard and fast guidelines. These loans are sometimes happening on long term financing.
The structures of bridges loans changes. Some borrowers layout their loans to pay off all the current pledge on a property while other borrowers use their loans as second on the top of their current liens. Once you are currently engaging in home selling, the proceeds will go towards paying the loans in the first case. In the second case, borrowers will continue paying the old and new pawn which is using funds from loan to expand your budget.
If you have a good credit and substantial and strong equity, there may be better options like home equity loan where you won’t pay for high-interest rate and fees. But, if you needed extra funds, you can take advantage of the bridge loan option. Have some knowledge about the interest rate, terms and fees associated with a bridge loan before you continue with the process.