A bridge loan is a short-term loan used by an individual (or business) who needs a fast cash infusion until permanent financing can be achieved. A bridge loan, sometimes referred to as a swing loan or gap financing, is generally expected to be paid back very quickly. Most bridge loans have a term of about six months to one year.
When would someone need a bridge loan?
Bridge loans are often used by prospective home buyers who are ready to buy, but who have not yet sold their current home. When the housing market is booming and houses are selling within days or weeks of being listed, a bridge loan makes little sense. But what about those times when the housing market seems to be moving along at a more reasonable pace?
Imagine, for example, that you find your dream home. You are eager to purchase it, except for one major setback: you need to sell your current home first. In the meantime, you can snatch up that dream house by applying for a bridge loan. A bridge loan can allow you to pay off the mortgage on your current house, or gather enough cash to make a down payment on your dream house while you wait for your current home to sell. In hindsight, the opposite situation would be ideal: selling your home, and then finding your dream home. But since life, and especially issues of personal finance, are not always ideal, a bridge loan is a viable option for anyone who finds themselves caught in between.
The terms of a bridge loan can vary widely. Some types of bridge loans allow you to completely pay off the mortgage on your current home. A fairly typical bridge loan might work as follows: the bridge loan is used to pay off the mortgage on your current home, and the rest of the money is used to make a down payment on your new home. In this type of scenario, closing costs and six months of prepaid interest are normally subtracted from the loan amount. If the first home is not sold after a period of six months, the borrower is usually allowed to begin making interest-only payments on the bridge loan. When the first home is sold, the bridge loan can be paid off in its entirety, with any unearned interest payments credited to the borrower.
Be warned that using bridge loans in this way'to span the disparity between two separate transactions?can be costly. Bridge loans often come with high fees, so make sure you understand the terms of your loan before signing. Also, be prepared to face the possibility of having to pay the equivalent to three mortgage payments (your current house, new house, and the amount of the loan itself) until your home is sold. Before even considering a bridge loan, speak to your real estate agent. Find out how long homes in your houses? price range are taking to sell. If the housing market is so slow that you expect your home to remain unsold for many months, a bridge loan may not be such a good idea.
Bridge loans are also commonly used in real estate investing. Individuals interested in investing in real estate property, but who may not have access to conventional loans, can use a bridge loan to make the purchase. Individuals who use bridge loans may be unable to qualify for conventional loans due to credit problems. Thus, many bridge loans are often available through non-traditional lenders, who offer interest rates ranging from 14 to 20 percent. These lenders often also charge ?points?, or fees, on these loans. One point is one percent of the total loan amount. Because these lenders are not as concerned with credit ratings as traditional lenders, bridge loans are much more accessible, though also much costly.
Bridge loans offer a fast and relatively easy way to receive a fast cash infusion. But they are also saddled with higher than average fees and interest rates. The best advice regarding bridge loans is also perhaps the simplest: don't use them unless you really have to.
Money is of extreme importance nowadays. Almost everything that we do involves money. The same is true if one wants to venture into business or buy a home which is one of the basic needs for survival. Financing or supplying of funds in business is a must to make it grow and achieve the desired expected profit (together with the right planning and managing). Common mistakes encountered by new entrepreneurs are wrong financing sources, underestimated amount needed for capital and inflexible financing types. These problems however can be prevented by careful planning and analysis of the various factors involved in starting a business.
In general, business people can choose from the two types of financing, the debt and equity financing. Equity financing is the type commonly used by small or growth stage entrepreneurs. The sources for this type involves the center of influence that trusts the entrepreneur, such as friends, relatives, family members and other people interested in investing their money in the business. However there are also capitalists who are ready to take the risk of financing small businesses. These capitalists may include financial institutions, authorized government agencies or well-to-do individuals in society. There are also venture capitalists that finance new business in the industry to get equity. Businesses that have been in the industry from three to five years are preferred by venture capitalists. They have various methods to manage or deal with the businesses that use their financing or invested money. They can influence the decision making policies of the business in the event its performance does not come up with the expected result.
Another general type of financing is debt financing. This type has varied sources which include Small Business Administration Loans, commercial loans through banks and personal loans from family, relatives and friends. The government recognizes the importance of business in the economy of the country and that is why they offer programs that can encourage the growth of small enterprise by having their own financing agencies tp help a lot of young business people and entrepreneurs. Debt financing through banks is the traditional means to fund a business. The banks act as a short term lender for the business person to have the needed money to buy equipment and machineries necessary for the business to flourish. The SBA or Small Business Administration Loans are used in the case of local banks. The loan that can be acquired can be from $5,000 to $2,000,000.
From these two general types of financing branch the various kinds of financing involved - not just in business but in other fields as well. A few of which are piggyback financing, owner financing and creative financing. Piggyback financing is used by home buyers who want to avoid mortgage insurance which is required when the mortgage is more than 80 percent of the purchase price. Through piggyback financing, the borrower can have two mortgages with costs that may vary. Owner financing happens when the owner or seller of the property is the one financing the buyer so in this case the owner acts as the bank. The buyer in turn can pay the needed amount monthly or whatever may be the agreement instead of going to the bank for financing. Creative financing happens when the house buyer has a third party lending institution which can be a bank or a loan agency.
Both Tabitha Naylor & David Arnold Livingston are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Tabitha Naylor has sinced written about articles on various topics from Vitamins, Mortgage and Home loans. Tabitha Naylor is an experienced mortgage broker/consultant with Apex Financial Mortgage. For more information, or additional resources on home loans, visit