How Do Bridge Loans Work?
A bridge loan is a short-term loan provided by a bank or private lender to a person or businesses needing a quick influx of money. It is a short-term loan only, generally up to one year, and it is often replaced by a long-term loan at better interest rates after something has been purchased or sold. The best example for this is buying a second house while trying to sell your first one. It is common that the timing of closing on a new home and the selling of your existing home don’t line up perfectly. A bridge loan fills in that time to overlap both sides.
The biggest advantage of bridge loans
The top advantage of entering into a bridge loan setup is its fast-moving process. One of the reasons bridge loans were created is to provide an option for people who need quick cash. You can’t always predict when opportunities arise and having a pre-approved long-term loan is even harder to predict.
This is where bridge loans make their mark by literally “bridging the gap” between two loans (or between the purchase and re-financing).
Purchasing an item straight away is highly possible
In a hurry to buy that property, but sort of cash at the moment? The bridge loan is the answer to your problem. Since you can apply for it, you don’t have to wait that long to have that property you have been eyeing. In just a short period, it will be possible. With Venus Capital, we specialize in helping with commercial real estate investors get the financing they need to purchase that property quickly and refinance later. We recommend a credit score of 680+ to make the process easiest.
The downside of bridge loans
Bridge loans aren’t all fantastic. They often come with larger interest rates and larger installment payments. Also, qualifying for bridge loans can be tougher and require a higher credit score. Often, private lenders are more lenient on credit score than traditional banks, but that comes at a cost. Some private lenders will require collateral for the loan which can be a big risk to some people.
Reasonable interest charged by banks
Gone are the days when you used to have higher debts every time you would run to the bank for solutions. With bridge loans, the interest is reasonable already. It is way cheaper compared to the fees banks charge for other types of loans. Fast-moving process and low interest. All you have to do here is pay the interest every month, and nothing would go wrong. What else would you look for in this setup?
Things to consider with bridge loans
Although the statement earlier says that you don’t have to panic in selling your property, you still have to make sure that someone will buy it before your agreed contract with the bank ends. Don’t be confused or discouraged in any way. Just ask yourself. Which situation is better when you fall short of money? Is it selling your property to whoever can buy it regardless if the amount is favorable or not? Or is it waiting for a more extended period to give way for better buyers? It is still a win-win situation for you.
There are risks in all decisions that you will make. That is pretty normal. But when it comes to money, more so lending money from the bank, you have to weigh things. You have to make sure that the pros of your decision outweigh the cons. Bridge loans may be user-friendly, but it still all boils down to how capable you handle things effectively.