Bridge Loans: How Do They Work?

On average, Americans have $38,000 in debt.

Sometimes, milestones in life can cost more than what we’re earning, and these milestones are time-sensitive as well. Without additional financial assistance, we’d never get ahead in life.

So you may be weighing your options when it comes to loans. One type you might be looking at, is bridge loans.

If you’re wondering about bridge loans and how they work, then you’re in the right place. In this article, we’ll give you all the important details so you can figure out if it’s the right loan for you.

What Are Bridge Loans?

As the name suggests, bridge loans are short-term loans intended to “bridge” the gap between two things. More specifically, this type of loan is used mainly for ibuying investment properties.

Bridge Loans are also called Hard Money Loans.

When you’re buying an investment home, you’re dealing with large amounts of cash, especially so if you’re selling your current house as well. You can only hope and pray that everything goes smoothly; otherwise, you might be financially strapped.

A great way to ensure you can cover the costs of your new house is to take out a bridge loan. Obviously, this will give you more cash to work with, and if the sale of your old home doesn’t happen, or doesn’t occur as quickly as you’d like, then you at least still have some money to put towards the new house.

How Do Bridge Loans Work?

If you’re already a homeowner, then you’re probably counting on the money made from selling your old home to fund your new one. But that’s only going to work out for you if the closing dates align.

Are you worried about them not doing so? Or do you already know that’s not going to happen? Then a bridge loan can get you through.

A bridge loan gives you temporary cash to offer a seller, so you can secure that new investment dream home of yours.

Usually, the maximum you can borrow for a bridge loan is 90% of the purchase price. However, some lenders may have other standards.

Bridge Loans Information

Remember: bridge loans are short-term, temporary loans. So their repayment terms are much shorter than with other loans.

Typically, you’ll get around 12 months to repay the entire bridge loan. Some lenders may have even shorter repayment terms. Some hard money lenders don’t have pre-payment penalties.

If you’re counting on paying back the loan with the money you make from selling your old home, then it shouldn’t be a problem for repayment, as you’ll be able to do so right after you get the cash.

But some homebuyers choose to pay their bridge loans back in other ways. One popular repayment method is a balloon payment; this is where you pay the full amount on a certain date.

Benefits of Bridge Loans

One of the biggest benefits of bridge loans is that you can use it on an offer for your dream house without needing a financing contingency. 

A financing contingency usually works in your favor. But for the seller, the fewer contingencies, the better.

So if you don’t have one with your offer, this makes yours more attractive than all the other potential buyers’. This is because you have all the money they want and can close quickly with little to no issues.

Quick Approvals

Some loans take a while to be processed and approved. In the case of buying an investment home, many times, you can’t afford to wait.

Both the application process and closing of a bridge loan is shorter than other types of loans. That way, you can get quick funding when you want to snag your dream investment home. It can be a huge advantage if you want to secure it before you’re able to sell your old home.

Disadvantages of Bridge Loans

Although bridge loans can help you out in a pinch, they’re definitely not for everyone. As with all things in life, these loans do come with caveats.

For example, they’re more expensive than getting a home equity loan. This is because bridge loans come with higher interest rates.

Also, in most states, it is required to buy properties under an entity, such as an LLC, or corporation.

High Origination Fees

You’ll have to pay origination fees with most lenders, and you’ll usually have to pay them for other types of loans as well. But for bridge loans, the origination fees are usually higher than conventional loans.

Expect to pay as much as 4% of the loan value when you’re looking at bridge loans.

Get a Bridge Loan or Hard Money Loan Today

Now that you’ve learned all about bridge loans, hopefully, you should have enough information to determine whether or not it’s something beneficial for you.

If you’re looking to sell one of your properties but your funds for a new house are tied up with it, then a bridge loan can be a great way for you to snatch up any good opportunities. But do be aware that they do come with higher interest rates and origination fees, and have a shorter repayment term.

So long as you’re aware of all the pros and cons of bridge loans, then it may be a good idea to explore if you’re planning on both selling and buying an investment home soon.

Have you decided that you need a bridge loan? Then apply for one now.