What is a bridge loan?

A bridge loan is a special type of credit that is used when there is an immediate need for financing. Its main uniqueness is its temporary nature, since it is granted only until the final loan is formalized, as long as the debtor ensures a future income. That is, the borrower must offer a guarantee of future income that ensures the return of the credit. Without this support, the financial institution will not grant the credit.

Just as a bridge is a construction that allows us to save a geographical accident and get to the other side, the bridge loan allows the applicant to go from one economic situation (need immediate financing) to another (get more extensive financing in the future nearby ) to achieve your goal (buying a home, for example). It is a short-term financing that occurs between the processing of two long-term loans.

 

Characteristics of a bridge loan

bridge loan

Although a bridge loan can be requested for business projects, its most frequent purpose is to be able to acquire a new home without the need to sell the current property quickly and under less advantageous conditions. Among its main characteristics are the following:

  • Have the main purpose of acquiring a new home for which some type of advance payment is required. That is, an immediate need for financing arises and we want to have a reasonable time to sell the current house, without the need to quickly sell it.
  • It is a temporary loan , since it is a temporary financing until the final credit is formalized. In fact, most entities grant a term of between two and five years, which they consider a sufficient margin so as not to “undersell” the main home at a price lower than the one set by the market.
  • They usually require more stringent requirements for their concession, since it is a financial product that involves greater risk for the borrowing entity (that the debtor is not able to sell the home and does not have the financial capacity to repay the loan). Thus, the applicant must provide a solvency guarantee or future income that ensures the return of the credit. Without this guarantee, the financial institution will not grant the credit.

 

Advantages of applying for a bridge loan

applying for a bridge loan

As we saw in previous lines, this type of financing is usually used to buy a home while the current one is in the process of being sold, which is why in the financial environment it is also known as a bridge mortgage.

The advantage of requesting a bridging loan is that the installment can be negotiated in such a way that it is paid with a lack of capital, that is, that capital is not amortized and only interest is paid. You can also negotiate a reduced special fee less than what will be paid once the mortgage is signed, so that it is comfortable for the client during the time that the initial house has not been sold.

However, once the term for the sale of the property has elapsed, if it has not occurred, the shortage (or in your case the special fee) will end, turning the credit into a conventional mortgage loan, with a system of usual amortization. If, on the other hand, the sale has been made, the money obtained may be used to amortize the outstanding amount of the first mortgage loan, as well as that of the bridge loan.

 

Ways to pay a bridge loan

Ways to pay a bridge loan

While the principal (or principal) plus interest is paid on personal loans or mortgages, during the two or five years of the bridge loan, your installments can be paid in three different ways:

  • Quota with lack of capital: only the interest of the loan is paid, without amortizing capital pending repayment.
  • Reduced special fee: a fee is paid less than that which will correspond when the current home is sold. Thus, the installment contributed each month is mainly intended to pay interest.
  • Normal fee: as usual in this type of financial products, principal plus interest is amortized.

 

Disadvantages of the bridge loan

bridge loan

Following the crisis caused by the housing bubble in our country, uncertainty is the order of the day in the home buying and selling market. Thus, although at first glance five years seems like a more than sufficient period to sell our house, we may not be able to formalize the transaction in the agreed time. Here the problems begin. Precisely, the main disadvantage of this financial product appears when, once the grace period ends. Thus, if we have not been able to sell our home, we will have to return the total loan, that is, the principal plus interest.

In addition, due to the double risk they assume, traditional financial institutions require guarantees and guarantees to ensure the operation. Thus, the study of each case is usually slow and cumbersome, and is only intended for very specific clients of the bank.

Therefore, we only recommend this type of financing when you do not have another alternative and you have verified that we are at a time of economic growth or stability in the real estate market.

Another option is to go for personal loans or quick loans. At Moneypoint we have designed the first line of credit for individuals that makes up to 5000 dollars available to you that you can return in comfortable monthly installments for a maximum of three years, with no management, opening or cancellation fees. In this way, if what you need is a small injection of liquidity to provide a signal in the purchase of an apartment, car or to start up your SME, this is the fastest and most flexible way of obtaining the money.

To finish, our advice is that whatever the financing method you choose, always make sure that you have a healthy economy to face the payment of installments or any other eventuality that may arise during the period of the loan. In no case is it advisable to purchase a financial product that does not fit our current or future situation.

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