A bridge loan is a type of short-term financing that is designed to bridge the gap between two larger financial transactions. It is often used when someone is buying a new property but hasn’t yet sold their old property. The bridge loan provides them with the funds they need to make the down payment on the new property while they wait for the sale of their old property to go through.
Here’s how a bridge loan typically works:
Qualification: The borrower must have sufficient income, good credit, and enough equity in their existing property to qualify for a bridge loan.
Loan amount: The loan amount for a bridge loan is usually based on a percentage of the borrower’s existing property’s value. Typically, it ranges from 70% to 80% of the property value.
Interest rate: Bridge loans usually have higher interest rates than traditional loans because they are short-term and have more risk. Interest rates typically range from 6% to 10%, depending on the lender and the borrower’s creditworthiness.
Loan term: The loan term for a bridge loan is usually between 6 months to a year, but it can be longer or shorter depending on the lender and the borrower’s needs.
Repayment: Bridge loans are usually repaid in a lump sum when the borrower sells their existing property. However, if the borrower is unable to sell their property, the loan may be converted to a longer-term loan with regular monthly payments.
Overall, a bridge loan can be a useful tool for someone who needs to buy a new property but hasn’t yet sold their old property. However, because they come with higher interest rates and more risk, borrowers should carefully consider their options and only take out a bridge loan if they are confident they can repay it on time.