If you are a real estate investor, you are probably familiar with the term “bridge loan”. These short-term loans are a tool that many investors use to leverage themselves in the market. Here’s everything you need to know about bridge loans and how they work in real estate.
What is a Bridge Loan?
A bridge loan is a type of loan in real estate that allows you to purchase a property before selling your previous property. This short-term loan serves as a ‘bridge’ for investors who want to purchase another property but have not closed on their previous property yet. It can be difficult for some investors to qualify for multiple mortgages at once. A bridge loan can provide useful in situations where an investor would be dealing with two mortgages at once. If you cannot afford to purchase another property before selling the previous one, a bridge loan is perfect for you.
When Should I Use a Bridge Loan?
A bridge loan should be used in real estate for many reasons. The most common reason a bridge loan is used is when an investor needs to pay off the mortgage on a property they wish to sell and still have cash available to make a down payment on their next property. If you have found a home in a competitive seller’s market or you are on not schedule with selling the previous property, acquiring a bridge loan would be the right choice. An investor that is unable to negotiate a home sale contingency into their impending purchase of a new home usually find themselves taking advantage of bridge loans.
What are the Costs Associated with a Bridge Loan?
Since bridge loans are short-term loans, they generally have higher interest rates and come with fees. Lenders must mitigate risk since these loans are covering two properties, not just one. The rate of your bridge loan will depend on the lender and current market conditions. When using a bridge loan, you can expect to see these fees:
- Appraisal fee
- Escrow fee
- Title policy fee
- Administration fee
- Notary fee
- Underwriting fee
On top of these associated fees, you will be required to provide capital for home inspections and closing costs. Although there are several fees associated with short-term bridge loans, these loans will get money in your hand faster than many other money lending options.
Benefits of Using a Bridge Loan
Bridge loans can be useful in many situations for investors, here are some of the benefits of using a bridge loan:
Fast Cash in Hand
Bridge loans get hard cash in your hand fast. Expect faster approval times than conventional loans when you use a bridge loan. If you need cash as soon as possible for a property, using a bridge loan is a viable option.
These types of loans offer payment flexibility since they often do not require payments for the first few months, or have interest-only options, giving the buyer more breathing room.
No Contingency Needed
A contingency is used in a home purchase to protect the buyer if they are unable to sell their original property first. A bridge loan avoids the need for contingency since your original property will be paid off with the bridge loan.
Adapts to Market Conditions
In the event of a slowdown in the real estate market where you are unable to sell your original property, a bridge loan offers you the flexibility of paying off your original mortgage without the need to sell it immediately.
A bridge loan gives you more options in your real estate strategy. You can decide how much of the loan you wish to put down on your next property. Bridge loans open up opportunities in your real estate strategy that can advance your portfolio.
RCN Capital offers short-term and long-term financing options for real estate investors. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs. Connect with us today to discuss your next real estate investment.