Why A Bridge Loan Can Be The Answer
The old joke is banks will only lend money to those who can prove they do not need it. Alas, there is more than a grain of truth in that statement. Ah, but what if you need money now and in dire circumstances? A bridge loan may be the answer.
To make things as complicated as possible, the financial industry uses terms no person in their right mind would. Bridge loans are one area where this is not the case. The bridge loan does just that. It bridges a period of time with financing.
We can look at a simple example in real estate to see how these loans work. Assume I sell my home and escrow closes on the June 15th. Now assume I buy a home and escrow closes on that purchase on June 7th.
I have a problem because I have a lag period of seven days between the date I have to pay for my new home and the date I get my money from the old home. A bridge loan can fill this gap and let me complete both deals without worrying about the gap.
Bridge loans are used more often in commercial real estate. They are often called opportunity loans. A business may see a unique opportunity to buy a property, but cannot wait for traditional financing.
Since we are looking at a shorter term period with plenty of risk, the way lenders make money on bridge loans differs from traditional mortgages. Why? Well, lenders cannot make a lot of money over the term of the loan because it is too short.
To make a profit, lenders take a two pronged approach. First and foremost, they are going to charge big points on the loan. You can expect 3 to 5 points at a minimum. The lender will also crank the interest rate up to double the going rate.
These numbers equate to a very expensive loan. When you need to move quickly, however, these loans are hard to beat. They are processed in a few days and the documentation needed is very slim. When things are hot, this can be a godsend.
Although bridge loans are considered pretty aggressive, there is one area where they are conservative. Loan to value refers to the percent of the total value of the asset that the lender will lend against. With bridge loans, that figure rarely goes above 65 percent.
While bridge loans are not all that common in the personal finance world, they can make all the difference in the world of commercial finance. If your business runs into a time problem, make sure to take a look at them.
