Bridge loans may seem like a complicated topic, but in reality, they are fairly simple. This article aims to help you gain a better understanding of this financing option.
What Is a Bridge Loan?
As defined by the US News and World Report’s page on the topic, “A bridge loan is a short-term loan used in both commercial and residential real estate.” In the case of residential borrowers, homeowners sometimes use this type of loan to secure a new house before selling their old one. In commercial real estate, a borrower might use a bridge loan to renovate rental units, obtain an office unit to lease out later, or for other short-term funding needs.
Pros and Cons
This type of financing presents several advantages. On the bright side, generally speaking, borrowers turn to bridge loans because of their speed and flexibility. For instance, if a real estate investor has an opportunity to buy an attractive property but needs to close on the property quickly, a bridge loan can provide the needed funding boost to make the purchase happen.
Another advantage is that in the case of non-recourse bridge loans, the borrower’s assets are not at risk. That’s because the lender can only try to obtain repayment via the property purchased with the loan, rather than going after the borrower’s assets.
Bridge loans do have some drawbacks. The biggest one is that this type of financing often features a higher interest rate than traditional loans. Additionally, bridge loans can be somewhat difficult to obtain: Borrowers generally need a very strong credit history and a reliable source of income. However, if used correctly, the speed and flexibility of this financing option can make it very attractive to homeowners and real estate investors alike.
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