Pros and Cons of Open and Closed Bridge Loans

Different loans can help you reach different goals. When it comes to investing in real estate, bridge loans are a great option. North Coast Financial hard money lenders offer a wide range of loan products to clients, including open and closed bridge loans. If you have questions about these loans and wonder whether they’re the right option for you, this guide is a great place to start.

What Is a Bridge Loan?

Bridge loans provide an immediate influx of cash while you are waiting for financing or for real estate to sell. For example, a person might seek out a bridge loan to cover expenses like utility payments or payroll, or to cover the sale of a new property while another transaction is in progress. Bridge loans often require some type of capital to secure the loan. They’re associated with higher interest rates to offset the risk assumed by private money mortgage lenders. They’re also referred to as gap financing or swing loans.

Bridge loans can be opened or closed. With an open-ended loan, there is no set due date for loan repayment. While this takes the pressure off the loan recipient, it also incurs a higher interest rate. With a closed loan, you will be provided an exact due date, at which point payment must be made in full. While the interest rate is likely to be lower with a closed bridge loan, terms are often short, usually six months to one year.

What Are the Pros of Bridge Loans?

There are many advantages to working with residential bridge loan lenders to receive the short-term funding you need. The biggest benefit is that the money will be immediately available, which prevents a disruption to business operations until funding is received. Additionally, monthly payments may not kick in for a few months, which is beneficial from a budgeting perspective. It also prevents you from waiting until a property sells to access much needed funds.

What Are the Cons of Bridge Loans?

Higher than normal interest rates are the biggest drawback to these types of loans. There’s also a risk that you will lose whatever collateral you put up if you’re not able to pay back the loan in the time afforded. This is especially true if you’re waiting for a property to sell, and it’s taking longer than projected. Or if the property sells for less than you assumed. In this case, you may have difficulty adhering to the terms of your loan, especially if you have a relatively short payback period.

What Are the Requirements to Be Approved?

When it comes to property as collateral, you must have a certain amount of equity in the real estate to gain approval. The lender will also want to see proof of your financial standing, which provides assurance that you can pay back the loan. This entails providing tax returns, bank statements, or pay stubs to establish proof of income.

Securing the right funding is key to achieving your financial goals. While bridge loans offer many benefits, they might not be right for everyone. Performing due diligence and discussing your goals with a skilled loan agency will help you make the right decision.

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