Bridge loans are types of short-term loans used to pay up current and urgent debts before permanent financing is secured. It serves as an immediate cash flow source when funding is urgently needed but still not available. Because of its pressing nature, this loan type comes with a high interest rate and has to be backed by collateral in the form of real estate property or business inventory. Companies and individuals can access this type of loan to pay up their obligations.
What are the Different Types of Bridge Loans?
There are four general types of Bridge loans, and they are the following: first charge, second charge, closed, and open bridging loans.
* FIRST CHARGE BRIDGE LOAN: This type of bridge loan offers the lender the property’s first charge. Meaning, in case of default, the owner of the first charge will recover the money first before other creditors. This comes with a lower interest rate compared to second-charge loans because of the low underwriting risk.
* SECOND CHARGE BRIDGE LOAN: This type of loan offers the lender the second charge to the property after a lender holding the first charge. These are loans payable within a year or less. Because of the higher risk accompanying this type of loan, the interest rate is also higher. The bearer of the charge will only be paid after the first charge lender has been paid.
* CLOSED BRIDGE LOAN: This loan type is payable within a predetermined period agreed by both parties. This also carries a lower interest compared to open bridge loans.
* OPEN BRIDGE LOAN: The repayment scheme for this loan is not established during the inquiry. Most of the time, there’s no fixed date for paying off. To secure the funds, lenders of this loan type deduct the interest in advance. This is preferred by borrowers who aren’t sure when they can pay up the loan. And since the risk of non-payment or delayed payments are high, the interest rate is also high.
How Does this Loan Type Work?
There is no hard and fast rule to determine whether or not a lender will agree to lend money to a bridge loan borrower. Most of the time, they only ask if the agreement makes sense before they grant the loan. Some lenders add the borrower’s existing mortgage to the new mortgage payments when they agree to the loan.
A couple of lenders qualify buyers by allowing them to pay in two instalments since these buyers already have existing mortgages on their collateral. The borrower will end up closing on the purchase of the move-up home before selling their existing residence. The proceeds of the sale of the original property can be used to pay the bridge loan and cover the new home’s downpayment.
The beauty of a bridge loan is you can grab opportunities that you will most likely miss if you fail to secure a loan. However, before you grab this loan opportunity, make sure to study its features, along with the pros and cons, to avoid setting yourself up to fail. Then, be vigilant and ensure a sound financial future for you and your family.
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