How a Bridge Loan Works

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The bridge loan (also called credit in fine, the bridging loan and more rarely, credit welding), it is a loan whose principal is due at the end of the contract. Its purpose is to fund the contribution of the first sale of a property, until the final or next interim payment.

Bridge loans are to a greater extent more costly compared to traditional financing options in the compensation of loan risk. They also entail higher interest rates, points, as well as other amortized costs in the course of a shorter period. In some instances, a lender may demand cross-collateralization plus a lower loan-to-value ratio, even if they are commonly set up expeditiously.

Basically, there are three types of bridging loans, and these are the bridge loan with a loan depreciable classic, bridge loan with a loan amortization, and the dry bridge loan, for whenever the value of the acquisition is equal to or less than the value of the property sold.

The loans are implemented in the following manner; the borrower sells their current property (house, apartment) and goes on to purchase a new property through a principal loan. The value of the first serves as an input for the second, and before the resale, buyer must apply for a loan for additional finance while waiting to complete the sale (bridging loan).

A bridge loan is identical to and also converges with a hard money loan. These loans constitute non-standard loans which are received on the basis of short-term, or unexpected situations. The hard money loan points to the lending source, who can either be an individual, investment pool, or private business entity. Which is also a non-bank in the field of producing high risk, high interest loans, while a bridge loan relates to the tenure of the loan.

On the other hand, bridge loans normally have interest rates ranging from 12 to15%, with periods of up to twelve months, and charges of between 2-4 points may apply. By and large, their loan-to-value (LTV) ratios do not surpass 65% as regards commercial properties, or 80% in relation to residential properties, on the grounds of the appraised value.

Between the date of purchase and date of sale, the borrower will have two votes. It will thus pay the principal loan maturities, together with the interests of the bridging loan. In some arrangements, the interests of a bridging loan are also shifted to the date of sale, otherwise known as total exemption.

A credit agreement must have an end date, it is initially projected as a theoretical end date of return of capital (usually two years), acknowledging that the credit is intended for repayment. If the value of the property sold is greater than that of the commodity, the borrower does not need the loan principal.

 

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