What Is A Bridge Loan?

What Is A Bridge Loan?

What Is A Bridge Loan?

A bridging loan is a good option if you are looking for short term finance till a larger loan can be obtained from a conventional lender. These are also known as swing loans or caveat loans. Whatever the name, it works as a temporary stop gap financing till a more permanent or next phase of financing can be arranged. It is taken out for a short period of time ranging from two weeks to three years.

Biggest benefit of such loan is of course the speed and relative ease with which it can be obtained. Suppose you need to pay down payment on your new house within next twenty days or you need money to buy out a business partner adamant on walking out. You do not have option of going through complicated paper work and wait long for cash in such situations. You need quick bucks and bridge loan is your best option.

Conventional loans have strict rules and regulations that need to be followed. Bridging finance can be obtained with little or no documentation as strict guidelines operating for larger loans are absent here. However, these happen to be high risk loans as interest rates are quite high, not to mention additional costs and high points associated with it. These additional charges and high rate of interest compensate fro risk of the lender. Bridging loan lenders often ask for collateral and a lower loan to value ratio as well. So think twice before applying for bridge loan and make sure it is your only option.

Interest rates for such loans typically range from 12 to 15% for loans with term of 12 months. Points charged by lender range from two to four. For commercial properties loan to value ratio will not exceed beyond 65% while for residential properties it cannot go beyond 80%, calculated on basis of appraised value of said property.

These loans can be of open and closed varieties. An open bridge loan has no fixed date within which the loan needs to be paid back. This means greater risk for the lender, hence this type of loan will have a higher interest rate to sweeten the deal for the lender. However, a certain date is set since when regular payments towards paying back the loan must start. A closed bridge loan will have a fixed date within which time loan needs to be paid back. This type of loan comes with lower interest rate than open ones.

These kinds of loans have many similarities with hard money loans as both are non-standard high risk loans taken out in times of financial crunch. Hard money loans refer to source of the loan which may be private individual, private company or an investment pool. Banks do not provide such loans. Bridging loan on the other hand refer to the duration of the loan. This is the only difference between the two.

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