Bridge loans are slowly gaining popularity. This kind of loan bridges the gap between the times where additional financing is needed. Bridge loans are short-term loans with high interest rates that are collateralized with either inventory or real estate properties. Example would be given to a realtor to fund his daily expenses until the borrower increases more money through debt or equity issuance. Bridge lenders typically earn more because bridge loans are more expensive than conventional financing like bonds and equity.
How do bridge loans work?
Bridging loans are offered to help individuals or corporation complete a specific purchase of a property before selling their existing home or property by giving them short-term access to bridge loans at a high-rate interest.
As well as helping homeowners when there is a gap in between the selling and acquiring a new property, bridge lenders can also help someone plan on selling quickly a renovated homer or help someone auction the property.
Some of the banks and private money lenders have grown more hesitant to lend in the middle of a financial crisis, there has been an incursion of bridging lenders into the market.
Rates are high than most conventional loans. Potential applicants of bridge loans are warned that there is higher risk of being ripped off if not taken with extreme caution. Private money lenders may offer 1.5% a month meaning it could go up to 18% a year.
Who are the targets for bridge loans?
Bridging loans are directed at real estate property developers and landlords, including but not limited to those buying at auction where a mortgage is quickly needed. Bridge lenders may also offer this type of loan to asset-rich borrowers who may be interested on lending for residential properties.
When should bridge loans be used?
It can be used for different reason, including buy and sell of property, property development and property investment. There has been an increase in number among borrowers who use bridge loans because of high street and private money lenders are taking their time to process loan application for bigger home loans. Some borrowers view bridge loans as an alternative to other lending types. It may sound tempting but you need to think properly and carefully because of the risk involve and you should have an exit strategy. You may not have any guarantee in being approved for a mortgage with a conventional lender after having a bridge loan. This is very risky as you can lose your home.
Importantly, if you have not tried bridging a loan before you need to stride carefully, as there are large legal fees, additional fees and other hidden charges that are not always specified. This just means that having a bridge loan could rise up your expenses. Simply put, having a bridge loan should not be used as a substitute to conventional lending.
Where to get a bridge loan?
Bridge lenders come in all sizes and shapes, ranging from personal private money lenders, the Financial Services Authority and some banks. If you want to get a bridge loan, it’s best to go to a regulated broker because they can advise you if its best or appropriate for you to get a bridge loan or not.