Say you’re a homeowner and looking for a newly designed house. Upon placing your current home on the market, you intend to move to a new apartment. But you’ve discovered that your property isn’t doing well in the market. You decided to go to loan lenders and ask for a bridge loan. 

You told the lenders that you’ll repay the amount once the house is sold to a new buyer. Having said that, after a month, your home is sold on the market, and you repay the loan to the lender. And that’s how a bridge loan works in real-life.

Bridge Loan – A Brief Overview

Bridge loans, bridge financing, gap financing, interim loans, or swing financing are all terms pointing at one board that says: the amount of money a borrower needs to buy a new property while finding ways to sell the present one. 

Basically, a bridge loan is short-term financing that comes with a high-interest rate to enable people to make a crucial decision when they are short on excess capital. The loan helps you to take steps such as financing a new home, buying essential items, fulfilling immediate requirements, or making a crucial money decision by placing any valuables as collateral.   

Usually, bridge loans are provided for a time period of one year. That means you have to find a way to sell your new home within 12 months; otherwise, heavy interest levies would apply to the initial investment, which can vary between 3.5% to even 24%. 

Bridge Loans in Real Estate 

One of the investment types on which you may need a bridge loan is real estate. As you know, real estate requires potentially higher funding to tap into the market. And predominantly, there are two types of financing that fuel such funding: 

• EQUITY financing
• DEBT financing

One comes from the pocket, while the other from the loan lenders. When you strike the right balance of both financing types, only then the terms of a bridge loan can work for you. Bridge loans can be advantageous in the following conditions: 

• You’re about to close-in the deal on your existing home while looking to finance a contemporary apartment.
• You’re looking for a newer home while your current living space is on sale.
•  You need to process the down payment for a new home. 

Comparatively, the bridge loan has a higher approval rate and goes through minimum checks. And most of the time, the loan request are accepted by the lenders by making sure that you have the required percentage of equity in hand. 

Only Residential Owners Require Bridge Loans?

No, that’s not the case! Commercial property owners, businesses of all kinds, and even non-profit organizations can apply for bridge loans from their respective lenders. Basically, bridge loans are for everybody who is looking for a new property by positioning a current one as collateral. 

A Quick Bridge Loan Analysis

Every financing decision has some risks involved. You just need to be cautious about the handlings and let the processes move as they like. Below are some pros and cons of bridge loans that give you a holistic picture of the whole procedure. 

Pros	Cons
Bridge loans are pretty helpful in attaining short-term financing while in search of long-term funding.	Usually, such loans come with heavy interest levies due to the shorter time frame of the provided capital.
It helps you in covering down payment, legal work, fees, taxes, and documentation costs.	With high interest comes different fees that need to be paid to access a loan.
Bridge loans have fast approval and transaction process than traditional loan requests.	They are eligible for not more than 12 months; you have to arrange funding sources hurriedly.
	Having mortgages to pay? Asking for bridge loans isn’t a good financial decision.

You have to remember this: a bridge loan is a facility that, if not used informedly, may produce bad results. Especially in real estate, you should be aware of the things you want to get your hands on because investment is huge, and you have to keep the risk to a minimum, or the convenience will become a hassle in a matter of days. 

Bridge Loans: Things to Know

As you’ve read a lot about bridge loans, to ease your hassle and make the information as digestible as possible, let’s summarize some facts about it. 

• Aside from residential real estate, commercial property businesses, startups for funding, and even governments can also acquire such a loan with minimal approval requirements.
  
  
• Aside from higher interest rates, you must also pay several administration fees, processing fees, escrow fees, notary fees, and loan origination fees.
  
  
• Bridge financing is also beneficial if you’re on the verge of buying a new home while your current one is in the seller’s market.
  
  
• You can leverage bridging loans to pay for the down payment of a newer property.
  
  
• Bridge loans have interest rates that can vary from 3% to even 25% in some cases.
  
  
• The interest rate is higher due to the shorter time frame of the loan payment. 

Financial tools such as bridge financing have a lot of distinct purposes for which they can be extremely beneficial. All you have to do is to get your basics right about the financing method, and the rest is all covered by the institution and your presence of mind. 

Conclusion

As simple as it sounds, bridge loans are good for filling financing gaps between your asset migration. In terms of real estate, they provide a way forward when you’re stuck between two ends: your house isn’t selling, and you need money for a new place. 

If you’re looking for a flat in Bahria Town in Karachi at affordable rates, smooth transactions, and scenic views, be sure to contact RAAS for more information.