A bridge loan is a small term loan which a property owner can avail to buy the new property before selling the old. There are two primary forms of the credit: residential and commercial. A commercial bridge loan can be used similarly as a residential one — a business owner uses the loan for the acquisition of a property before selling another. However, commercial bridge loans can be used in so many other ways as well. This can be a better way out if the company is trying to quickly acquire a piece of property that could be lost in the time it takes to secure long-term financing.
How a company or a business can benefit from the commercial bridge loan.
A company can benefit from the bridge loan in its real sense only if they qualify for a traditional commercial mortgage. A recently purchased property with a low occupancy rate or poor condition needing major renovation can be a high spot where the loan can advantage the business owner. Besides, a bridge loan can be a short-term solution to settle all the cash flow issues when a business is waiting for long-term financing to come through.
The pros and cons of a commercial bridge loan.
There are both benefits and risks associated with a bridge loan. Following is a detailed assessment of the advantages and disadvantages of acquiring commercial bridge loan:
• The most prominent drawback is that the borrower’s old property will not sell within the term of the bridge loan.
• An obligatory agreement of sale of the former property can abate this risk, but the borrowers can make a conscious decision by researching the housing market in their area.
• It is essential to determine an average of how long the homes or the properties have been listed before they were made available for sale.
• Based on your findings and research, the borrower may want to negotiate terms that allow for a 6-month extension on the bridge loan.
A bridge loan is typically good for at least six months since it is designed to be availed on the short term, but can often be extended up to a full year.
• You can customize your plan; bridge loans can be structured in different ways depending on the borrower’s need.
• Pay close attention to your own need and the value of the property you are pledging against the loan. The interest rate is often 2% or more above the average fixed-rate product, but it can vary widely along with terms and fees.
• A borrower may be able to secure better rates and terms by getting both the bridge loan and the long-term mortgage from the same bridge loan lenders.
Are there ways othe than getting a Commercial Bridge Loan?
There are a number of ways to avoid a bridge loan. Following are some ways discussed in detail.
HELOC or Home Equity Line of Credit
If a borrower has significant equity in the old property, a HELOC could be an option. Based on the borrower’s maximum draw amount, they may be able to use the available money from their HELOC for the down payment on the new home.
Financing a down payment with pledged assets
A less common down payment option is a pledged asset mortgage. It’s an option when a borrower wants to purchase a property but doesn’t want to make the down payment. Instead of a down payment, the borrower pledges assets such as stocks, bonds, CDs, savings, or mutual funds to use as collateral on loan.
The above mentioned is a detailed discussion about the commercial bridge loan which may prove very useful if taken and used sensibly.