You might be wondering what is a bridge loan, here you can know the details of this interesting concept.
Just to tell you a few of the important takeaways of this concept, you should know that this is a short-term financing loan and it is mainly availed by those individuals who want to get rid of their existing obligations.
Furthermore, these loans tend to stay short-term and they last up to a year’s time frame. Moreover, such a loan type is massively and commonly used in the real estate side.
Like, if you want to purchase a new home for yourself, then you avail and use this loan.
Rests of the details on what is a bridge loan are written below for you:
- 1 What Is A Bridge Loan?
- 2 Example of a Bridge Loan:
- 3 How Does A Bridge Loan Work?
- 4 Bridge Loans vs Traditional Loans:
- 5 Conclusion!
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What Is A Bridge Loan?
First of all, we like to tell you that this loan is basically and generally a short-term loan type. Its main job and purpose are to give financing to individuals who are facing sudden transitions.
Like, you can apply for this respective loan if you are moving and shifting from one house to another. You may have heard about the concepts of mortgages and home equity loans and other kinds of loans.
In the same way, we have this bridge loan that is secured right by your current home and it is marked as collateral.
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Main Elements of a Bridge Loan:
As we have given you basic info on what is a bridge loan, now you should know about the basic elements that are encompassed in this concept.
Its total term range up to 12 months and you are going to be charged with 2 to 4 points. Furthermore, the loan to value ratio that is part of this loan does not exceed up the standard.
Like, for the commercial properties, this loan to value ratio is 65%, and then for residential properties, it is around and about 80%.
History of a Bridge Loan:
It was in the early time of the 1960s when this short-term financing was available for the very first time in the UK. Most importantly, this loan service used to be available in the high street banks.
As soon as the global recession starts to take place, then this loan type gained massive and immense popularity. Its gross lending stats becomes higher and higher.
So far in the United Kingdom sites, these loans are typically used and applied in the real estate sector and business sector.
They are taken to boost and enhance the business cash flow site.
These loans are excessively sold to landlords and also to the property developers. Now, you know what is a bridge loan!
Pros of Bridge Loans:
One of the common benefits that are offered by this bridge loan concept is that it is highly flexible. It gives a seamless and hassle-free lending opportunity to the borrowers.
This loan comes in the form of short-term capital and it lets you easily meet and fulfill your current expense obligations.
With this loan, you can be in a position to complete your renovation tasks and to look for new tenants.
These kinds of loans are generally non-recourse. In other words, the lender can demand repayment of the respective loan just through the property itself.
Cons of Bridge Loans:
Moving to the cons side of bridge loans, there are a few of them! Though this is a flexible loan type, it is accompanied by the factor of higher interest rates.
These loans are injected and embossed with steeper price tags.
Furthermore, you have to pay higher interest rates if you are interested in applying for this loan.
This loan works on the short term nature plan, that is why this aspect of higher interest is seen.
To become eligible for this loan, you have to show and give some guarantee.
Below you see more details and facts on what is a bridge loan and if you have any questions, you can ask us.
Example of a Bridge Loan:
Once you have understood the basics of this concept, now we can explain it to you further about it with the help of examples.
We have collected a few of the examples and we are sure that with the help of these illustrations, you can well know what is a bridge loan!
Like, if you are planning to purchase and get a new residence for yourself and you want to immediately make a down-payment, then you can apply for this subjected loan.
This way, you can have the equity from your current home and use this equity in the form of a down payment to buy your future home.
For ensuring smooth and seamless business operations, this loan is commonly and excessively used. As an example, if one partner of your business wants to leave the business, the other partner can apply for this bridge loan so that business operations can get continued without any hassle.
Moreover, if you want to purchase some sort of auction property and you do not have sufficient money, then this loan can help you at this time.
Like, for purchasing any kind of auction property, you have got around and about 14 to 28 days to process with this deal.
So, in this scenario, it is better to apply for this short term loan.
How Does A Bridge Loan Work?
The working of bridge loans is simple enough. The above-mentioned details on what is a bridge loan tell us that this loan concept works on simplistic terms.
Most importantly, these kinds of loans vary and differ a lot on the basis of their terms, conditions, and costs. Some of these loan types are structured and some remain to stay unstructured.
Furthermore, these loans are entailed with monthly payments or arrive in the form of lump-sum interest payments. All in all, we have noticed that this loan kind fulfills the tenure of 6 months.
It is observed that these loans are expensive and not cost-friendly to purchase. Their closing costs turn out to be a few of the thousand dollars.
The borrower even has to pay 2% of the bridge loan original value. These loans are accompanied by the factor of origination fees.
To discuss the details on what is a bridge loan, you can take this example for your further understanding.
Like, you have got a bridge loan for $70,000 and current home worth is $100,000 and there is a $50,000 balance left-right on your mortgage.
Keep in mind that out of that $70,000, this amount of $50,000 is going to go and enter toward the mortgage, and this amount of $2,000 is going to get enter into closing costs.
And it is due to this bridge loan that you will now be getting $18,000 for your next and future purchase. That is how we define when it comes to what is a bridge loan!
More on the Working of Bridge Loans:
We have gathered more of the details on this topic of what is a bridge loan and below you can see how in general this loan concept works and operates!
This loan is also given the name of interim financing. You can even give it the name of gap financing or swing loans.
At times, this loan type is identified in a way that bridges the gap right during the times and situations when immediate financing is needed and required but not yet available.
All kinds of corporations make use of these bridge loans and it is these lenders that possess this power to customize these loans according to the varied and different situations.
It is because of the arrival of bridge loans that homeowners have entered a strong position to purchase a new home. But you do have to remember that these loans are infused with a higher interest rate as compared to other credit facilities like we have a home equity line of credit.
You can freely share with us your feedback and comment regarding your thoughts on what is a bridge loan!
Bridge Loans vs Traditional Loans:
In the last part of this piece of writing on what is a bridge loan, you can now differentiate clearly and evidently between bridge loans and traditional loans.
It is obvious that bridge loans come with a faster application process. Their approval processing phase is fast and quick.
In addition, the funding process of this loan type is quick and hassle-free as compared to applying for traditional loans.
This is the exact explanation of what is a bridge loan! Moreover, these loans have relatively short-term durations and high-interest rates.
They ask for large origination fees. A large number of borrowers apply for this loan because they are in emergency need of funds for their smooth business processing and operations.
Borrowers have no problem while paying higher interest rates for bridge loans because they get quick and instant access to funds as well.
These bridge loans do not have and show any of the repayment penalties.
You have understood the concept and overall approach on this what is a bridge loan, it is up to the readers to decide whether traditional loans are suitable for them or whether they should apply for bridge loans.
So, what’s the bottom line? Now, you know what is a bridge loan and what important factors it encompasses!
In addition, this one is a flexible financing option that you can freely avail of. Besides, it gives out all of the borrowers this handsome opportunity and chance to cover all kinds of their short term expenses.
But you have to remain aware that with the utilization of this loan type, you may have to face certain cons.
You can keep in touch with us as more details on what is a bridge loan is sooner to becoming.