Real estate investing can be a challenging business to manage, especially when you have to juggle the costs of down payments and renovations without regular cash flow. For instance, if you’re just getting started with your first property or trying to purchase a new investment property prior to flipping your current property, you may need to take advantage of a bridge loan.
What Is a Bridge Loan?
As the name may suggest, a bridge loan is used to provide short-term financing, usually until you can stabilize the property by completing the necessary repairs and leasing it out prior to obtaining permanent financing.
Bridge loans provide 12 to 18 months of financing and can be helpful when you’re up against a time constraint.
When Is a Bridge Loan Used?
As an investor, there are several cases in which a bridge loan can be valuable, including:
A Need to Cover the Cost of Remodeling
You Need Fast Funding
You Need a Short, Flexible Loan Period
A bridge loan will typically last 12 months, although two to three-year terms are also available. But best of all, borrowers will have the option of extending their loan period on an as-needed basis, typically in six-month increments. This flexibility allows you to customize your loan to your renovation/stabilization needs or the timeline of your investment.
You Want Time to Shop Around for the Right Financing
You Have Less-than-Average Credit
How Does a Bridge Loan Work?
Typically, a bridge loan does not amortize so the full principal amount is due at the end of the loan term, but requires the borrower to submit monthly payments of interest. Depending on the lender, you may be able to extend the loan period, but usually not for more than a few months.
Bridge Loan Interest Rates
Beyond these rates and fees, you’ll also have to meet certain financial obligations to be eligible for a bridge loan. Typically, lenders will expect you to make a 20% down payment at the closing of a bridge loan.
Know Your Financing Options