Are you looking for a bridge loan to help fund a new home purchase, remodel, or another real estate investment opportunity? If so, you must take the proper steps to secure a successful financial journey.
A bridge loan is a temporary financing solution with a short term – typically ranging from a few weeks to a few years – that is secured by collateral, such as real estate. It provides a source of funding until a person can secure permanent financing, or an existing debt obligation can be met and removed.
This blog post will discuss how a bridge loan can help empower real estate investors. A short-term loan can be a great financing tool that closes faster than a personal loan or conventional mortgage.
Let’s look at bridge loans, how they work, their benefits and drawbacks, and the terms of RBI Private Lending’s bridge loan product. It should help give you a better understanding of when a bridge loan is a viable financing option and why you should turn to RBI should the time arise for this kind of temporary funding solution.
What Does a Bridge Loan Do?
Bridge loans can be most useful in competitive real estate markets where buyers often need to move quickly to secure a new property. However, they come with higher interest rates and fees than traditional home loans due to their short-term nature and associated risk. Hence, they should be considered carefully, keeping in mind one’s financial situation. Typically, they are structured so that your monthly payments cover interest only and have a balloon payment at maturity, or when you sell your original property.
At RBI, our bridge loans support the purchase of a variety of property types:
- Single-family residences
- Two to four units
- Multi-family homes
- Condos and hotels
- Other property types are on a case-by-case basis
Bridge Loan Terms and Repayment Structure
The exact terms, conditions, and qualifications associated with bridge loans can significantly differ by lender and from transaction to transaction based on the borrower’s qualifications. That said, due to the short-term nature of bridge loans and their perceived higher risk, they typically come with higher interest rates and fees. As such, prospective borrowers should consult with financial advisors or lending professionals to understand the details and implications of a bridge loan.
RBI’s bridge loan terms are as follows:
- Max Loan Amount: $10,000,000
- Max LTV (Loan to Value): 70%
- Rate: Starting at 9.99%
- Term of loan: 12-24 months
- Payments: Monthly Interest Payments with
Balloon at Maturity
- Prepayment penalty: None
We are usually able to close bridge loans in 5-10 days. And these loans typically have interest-only payments.
When to Use a Bridge Loan
The most common reasons for considering a residential bridge loan include:
- To buy a property but time is needed to arrange financing
- To buy a distressed property at a discount and financing is needed to close the deal quickly
- To take advantage of a short-term opportunity, such as a property that is about to be sold at an auction
- To buy a property but time is needed to repair or renovate it before refinancing
- To buy a property but the seller will only accept cash
- To buy a property in order to sell it quickly for a profit
Pros and Cons of Bridge Loans
Like all other financing options, bridge loans have several advantages and disadvantages. Let’s consider the pros and cons associated with this type of borrowing.
- Quick access to funds for time-sensitive transactions
- Ability to make an offer on a property without a contingency
- Flexibility in loan terms and requirements such as interest-only payments, or payments that are deferred until you sell
- Potential for higher returns on investment
- Ability to avoid the need for private mortgage insurance with a higher down payment
- Quicker to close than traditional loans
- Allows homeowners and real estate investors to finance larger purchases like a new home or apartment complex without draining their bank accounts and putting long-term investments at risk
Disadvantages and risks:
- Higher interest rates and fees
- A minimum home equity requirement
- Short-term nature
- Market fluctuations
- Unexpected obstacles such as having trouble selling your current property
There are some situations where real estate investors will want or need to buy before they sell, meaning they don’t have the profit from the sale to use for the next project’s down payment. In the meantime, a bridge loan can provide the cash you need to purchase a property. But be sure to weigh the pros and cons before making a decision.
Talk to the professionals at RBI Private Lending to help you make the best financial decision and discuss the next steps for your bridge loan application. For more information, contact us today.