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Bridging Loans
Want to buy a new home before you sell your old one? Below information will help you understand how you can bridge this gap with the help of a cheap bridging loan.
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What is a Bridge Loan?
A bridge loan (also known as bridging or swing loan) is a type of short-term loan, typically used until a person or a firm secures long-term or larger financing allowing the borrower to meet immediate cash needs.
Bridge loans are short-term loans (2 weeks to 3 years) with relatively high interest rates than conventional loans and are backed by some form of collateral such as real estate. The interest rate on bridge loans is kept a little higher to compensate for the high risk for the lenders. On the other hand they are typically arranged quickly with relatively little documentation. |
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As the name suggests, a bridge loan bridges the gap between more permanent methods of financing; these loans are mostly used in the real estate industry by investors. The repayment duration of a bridge loan can be as short as two weeks (short term bridging loan), or may last up to three years. Typically, the borrower must offer some form of security against the loan generally a home. Apart from the high interest rate a borrower might also have to pay high loan origination fee and some other fees associated with the loan.
Uses of Short Term Bridging Loan
Bridge loans are most often used in the real estate industry for real estate purchases to quickly close on a property, or take advantage of a short-term opportunity in order to secure long term financing. Bridge loans on a property are typically paid back when the property is sold. Bridging loans are extremely useful as it provides an immediate flow of capital. Apart from real estate purchases people can also use a bridge loan for buying a used car or any other purpose.
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Bridge financing can be risky for the lending bank, since the borrower may not always be able to repay the loan. Bridge loan interest rates are usually 12-15%, with typical terms of up to 12 months 2-4 points may be charged. Loan-to-value (LTV) ratios generally do not exceed 65% for commercial properties, or 80% for residential properties, based on appraised value.
Most banks do not offer real estate bridge loans because the risk associated in lending. Bridge loans are therefore more likely to be offered by lenders that indulge in the business of the high risk, high-interest loans.
As compared to a bridging loan, a home equity loan comes with a lower interest rate.
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