The U.S. asset-based lending market share is over $465 billion. Asset-based hard money loans or bridge loans provide flexible terms for investors by leveraging their assets (properties) as collateral. Asset-based bridge loans are a great option for an investor to purchase a new property before having to sell any of their existing assets or property.
Bridge loans are in many ways similar to hard money loans as the interest rate, terms of repayment and faster loan process are what both the loans offer to a real estate investor. Bridge loans are a temporary source of funding to secure a purchase of an investment property and cannot be an alternative to traditional mortgage loans. Investors with a shortage of funds and time to purchase a new property can opt for bridge loans.
What is a Bridge Loan?
As the name suggests, bridge loans are a type of temporary financing used to bridge the gap between the sale of a property and the purchase of a new one. Secured by collateral bridge loans are also known as bridge financing, bridging loan, gap financing, interim financing, and swing loans. Bridge loans are short-term loans taken on a temporary basis usually lasting for 6 months to 1 year.
Most real estate investors who invest in fix and flip properties or use the BRRRR Method (Buy, Rehab, Rent, Refinance, Repeat) take bridge loans to purchase another property without selling the first one. Bridge loans allow investors to have extra funds to invest in newer properties by utilizing the equity built upon their existing house.
The interest rates for a bridge loan are also higher than the traditional mortgage loans, typically ranging between 6% to 10%. The borrower will have to provide their existing property as collateral to secure the debt and must have at least 20% equity in the property to acquire a bridge loan.
Many investors find resemblance in bridge loans to hard money loans and often get confused between them. Let us have a comparison between both terms and understand the similarities and differences.
Similarities between bridge loans and hard money loans
1. Secured by Assets
Both hard money loans and bridge loans are primarily provided on the asset to be used as collateral.
2. Short-term Loans
Bridge loans have a similar term to repay the loan. A typical hard money loan will last for 6 months to 1 year and a bridge loan for 6 months to 3 years.
3. Have Flexible Terms
Both hard money loans and bridge loans offer flexible repayment terms to a borrower. A lender will structure the loan according to the borrower’s requirements and the situation. This may also allow investors to pay interest-only monthly payments while making a balloon payment at the end of the term.
Differences between Bridge Loans and Hard Money Loans
Hard money loans are always provided by an individual or a group of private investors. Whereas a bridge loan is mostly a hard money loan, it can be provided by a conventional lender too.
2. Equity on the Property
It is mandatory to have at least 20% equity on your home to obtain a bridge loan. This is not the case with hard money loans, lenders will only look for the after-repair value of the property on offer as collateral.
3. Purpose of the Loan
Bridge loans are primarily taken to fill the gap between the sale and purchase of a property. The funds can be used to pay the down payment for purchasing another property.
Most of the investors look at hard money loans as an alternative to conventional loans for real estate investing. Hard money loans can be used for multiple investment purposes like purchase, renovation, construction, or refinance.
When Should You Take A Bridge Loan?
Investors will primarily require a bridge loan to fill the gap between the sale and purchase of a property. Most investors who know that they will be able to sell the existing house quickly can make use of the bridge loans to invest in another lucrative property. In this way, the investors can have access to quick money without having to wait for the sale to happen on their current property. Investors may also have different reasons to opt for a bridge loan. Such as,
1. To pay off the existing loan before they secure another long term loan
2. Found another investment opportunity and require quick funds to secure the real estate
3. Cannot afford the carrying or holding costs of the existing loan
4. Need to refinance the existing hard money loan and switch to long-term financing
The Pros of Bridge Loans:
- Quickly access funds to invest in another property without having to sell the existing one.
- Investors can avail of flexible loan terms that can be easily negotiated with the lender
- Quick funding process, fewer documents, and underwriting required.
- Ability to make an offer on a new home without having to apply the sale contingency.
Cons of Bridge Loans
- Bridge loans typically have a high interest rate and APR.
- Investors will have to make sure they’ve built at least 20% equity on the existing property to qualify for a bridge loan.
- Most financial institutions will extend a bridge loan ‘only’ if an investor is willing to obtain a new mortgage from them. Also, few lenders provide a bridge loan.
- Unable to sell your existing property can lead to foreclosure and that will cost you more.
The Bottom Line
Bridge loans enable investors to access quick funds without selling their own residence or existing investment property. Investors can make use of the funds to pay off their existing loans or any debts. The best use of bridge loans is to pay the upfront costs like a down payment to acquire a new investment property.
Investors can easily apply for a hard money loan to purchase a new property or refinance their existing loan with experienced lenders like 14th Street Capital. Get access to hassle-free hard money loans with minimal documents and flexible terms to best suit your funding requirements.