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What Is A Bridge Loan?



Loans have become an integral part of our lives. They make it possible to receive sufficient funds for various types of expenses. There are many types of loans based on the purpose, duration, and amount. The most common method of classifying loans is purpose-based. These are the main types:

  • Personal or consumer loans. They are used to cover a wedding, vacation, and medical expenses, etc. This loan is quite popular when borrowers purchase equipment such as computers or smartphones.
  • Student loans, intended for paying tuition fees.
  • Car loans to obtain new and used vehicles.
  • Mortgages for the sake of purchasing real estate.
  • Bridge loans or, in other words, short-term loans.
  • Payday Loans such as Payday Depot to cover unexpected expenses.

Аll of the loan types listed above are meant for individuals. For legal entities, there are commercial loans that cover various business expenses.

Аnother classification of loans is based on their duration. On this basis, loans are classified as:

  • Short-term loans.
  • Medium-term loans.
  • Long-term loans.

Let’s talk about one specific loan type: a bridge loan.

Purpose of the Bridge Loan

A bridge loan is a secured short-term loan typically used by borrowers when they decide to sell their current house and buy a new one at a higher price. With bridge loans, homeowners cover the expenses of purchasing a new property until they have sold their old one.

How Does It Work?

The bridge loan amount that borrowers can receive depends on how much their share in the current house is. To be qualified, a borrower must own at least 20%. The funds received from the sale of an old house become a source of the bridge loan repayment. The borrowers are typically given up to one year for repayment, and in general, their loan-to-value ratio is around 65-80%.

As for the application and approval process, they are relatively fast. Borrowers can pick a monthly payment schedule or pay off the entire loan after receiving money from the sale of their old house.

What Are The Bridge Loan Fees?

Bridge loan interest rates and fees are higher due to risks as opposed to mortgage loans. Borrowers can’t guarantee whether they will sell the old house in a short period or not and that there will be no difficulties with payments. So, lenders will study their credit history and financial condition more carefully. Bridge loans may require legal costs for a lawyer, lender fee, appraisal fee, notary fee, escrow fee, closing fees, etc. Apart from these expenses, lenders ask for collateral in the form of a house.

Bridge Loan Alternatives

If the conditions of the bridge loan don’t satisfy you, the choice may be:

  • Home equity loan
  • Home equity line of credit

These loans require the borrowers to use their home equity as collateral. The difference between these two is that the first has a fixed interest rate and term. The second one has a floating interest rate and is a credit line; that is, you can repay the loan and withdraw money again. The most important thing in contrast to bridge loans is that both have lower interest rates.

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