A bridge loan is a type of financing used by homebuyers when they want to purchase a new property before their current one sells. It can also be used by businesses to cover operating expenses while they wait for long-term funding. Other terms for this type of financing include:

• Bridge financing
• Gap financing
• Bridging loan
• Interim financing
• Swing loan

When used in real estate transactions, the borrower must have at least 20% equity in their current property and must be willing to put it up as collateral to secure the funds. A bridge loan is a short-term solution (6 to 12 months) and the interest rate is usually between 8.5% to 10.5%, which means it’s more expensive than traditional financing options.

However, the application and underwriting is usually faster than traditional financing, making it ideal for borrowers who expect a quick sale on their current home.

• How Does it Work?

When it comes to selling a home and buying a new one, it can be hard to secure a contract on the current home and close on the new one at the same time. Many homeowners don’t have the funds to make a down payment on the new home without the funds from their current one. This is where a bridge loan comes in.

The homeowner can work with their mortgage lender to obtain a loan to bridge the gap between the sale of the current home and the purchase of the new one. Though this type of financing is secured by the home, the interest rate is often higher than other options because it’s a short-term solution. Once their current home sells, a portion of the profits can be used to pay off the bridge loan.

Unfortunately, if the home does not sell within that period, the homeowner must make payments on their first mortgage, their new mortgage, and the bridge loan. Therefore, a bridge loan is risky.

When Should You Use a Bridge Loan?

A bridge loan is commonly used when the homeowner wants to purchase a new property before selling their current one. The funds can be used to pay off the current mortgage while using the rest as a down payment on their new home or it can be used as a mortgage on their new home.

Businesses can use a bridge loan to fund short-term expenses or take advantage of a real estate opportunity. These loans are typically offered by hard money lenders and online alternative lenders. The interest rate is higher on these than on other types of business financing.

Costs Associated with Bridge Loans

A bridge loan is a great way to get the funding to purchase a new property before your current one sells. However, it is more expensive than traditional funding. The interest rate depends on the size of the loan as well as your creditworthiness. Typically, it ranges between the prime rate to 10.5%. If the loan is for business purposes, the rate is usually higher, ranging from 15% to 24%.

In addition to interest, borrowers must pay:

• Closing costs
• Administration fee
• Appraisal fee
• Notary fee
• Legal fee
• Escrow fee
• Title policy costs
• Loan origination fee

Alternatives to Bridge Loans

Bridge loans are a great option when you need funds but you don’t have access to long-term solutions. However, you risk losing your current property, it’s a short-term option, and it usually has high-interest rates. Before you commit to a bridge loan, consider other alternatives, including:

• HELOC (home equity line of credit)
• Home equity loan
• 80-10-10 loan
• A business line of credit

Advantages & Disadvantages of Bridge Loans

Below, we’ll take a look at the advantages and disadvantages of bridge loans:

Advantages

• Quick access to funds
• Flexibility when shopping for property
• The faster process from start to finish compared to other options

Disadvantages

• High-interest rate
• Requires a minimum of 20% equity in current property
• Secured debt
• Must pay debt service on current mortgage and bridge loan

Conclusion

If you believe that a bridge loan will work for your needs, contact Gipson Commercial Solutions. We’ll be happy to help you secure your bridge loan to help you transition from your current property to your new one.