What is a Bridge Loan?
Understanding Bridge Loans
A bridge loan is a temporary, short-term loan that is used for financing a greater expense. It bridges a financial gap during the provisional stages of buying and selling property, building or expanding a business, or developing a product.
Like all loans, a purpose for funds is usually established before a lender will offer terms of agreement. However, a bridge loan is typically put together very quickly, with little waiting time between requesting the funds, and receiving the funds. Because of this, interest rates on bridge loans are usually higher than other types of loans. Essentially, there must be major profit incentive for a lender to take on the risk.
Many lenders do not set minimum credit requirements, or complete extensive, time consuming reviews of an applicant’s income to debt proportion; as long as the requested amount is within the lender’s comfort zone. This is indicative of the nature of the situations in which bridge loans are requested. Usually, there is a looming monetary deadline, or a requirement on the borrowers behalf that must be met immediately.
A software developer needs a little more research and development funding before the first prototypes are built, requests a bridge loan. A family Closing on a new home, while still owing on an existing mortgage, might request a bridge loan. A successful business decides to try expanding their client base, or the owner wants to market their own brand, they’ll request a bridge loan.
Fees for a bridge loan are fairly significant. The appraisal and administrative fees alone will run about a thousand dollars. Both the escrow and title policy fees come to just under a thousand dollars. Following these expenses, the origination fees can range from $500 dollars and upward, depending on the loan amount. Borrowers should pay special attention to conceptualizing the total cost of a bridge loan before interest.
There are no immediate payments due for three to four months. The interest, which is usually around 10-15%, gives the borrower much incentive to repay as fast as possible. To give some perspective on borrower risk for a bridge loan, there are a number of private student loans, that have interest rates hovering around 9.5%. Interest rates this high, are crushing for a student fresh out of college, but for a borrower with equity and a good plan, 10% is a temporary burden that is manageable, if they are careful.
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