How to Identify and Differentiate Existing Bridge Loan Types
Bridge loan is a short term financing option that are mostly used in meeting current obligations before a more permanent funding is secured. It facilitates funding gaps, just like bridges facilitate physical gaps. It is quite important because it provides an intermediate money flow when needed funds are not yet available, and it is a comfortable funding alternative because it attracts only relatively high interest rates. You could therefore count on bridge loan when you are disappointed by the conventional money lenders.
Collaterals are usually required to secure bridge loans but are limited to inventory and real estate properties. Heads up, both individuals and companies are eligible to receive bridge loans once certain obligations have been met. The obligations are subject to requirements by the Bridge loan Bronx in New York, and such could include some documentation and agreements.
Types of Bridge Loans
As it has been investigated to be with bridge loan New Jersey and in New York, this type of loan comes basically in four different kinds as follows;
Closed Bridging Loan
This type of bridge loan is available for a predetermined period which is usually agreed upon by the lending and borrowing party. Lenders favour such agreement more because they have a greater level of certainty for loan repayment. This may therefore attract a considerable low interest rate than open bridges as a compensation for the clarity in repayment plans.
Open Bridging Loans
Complete opposite of the closed bringing type, loan repayment is usually undecided at the initial inquiry, meaning that there are no fixed payoff dates. Lenders believe that with the arrangement, it might be a little more difficult to collect their money back, they therefore ensure a tighter security on their funds by deducting the loan interest in advance. This type of bridge loan is preferred by borrowers who are uncertain about their repayment plans as at the time of loan request. Due to this fact, lenders usually charge a higher interest rate for this loan type.
First charge Bridging Loan
This type is clearly different from the open and closed bridging options. Lenders are allowed a first charge over borrower’s property. This ensures that if there’s a default, the first charge bridge loan lender would receive his money before the other lender in the agreement. There is a low level of underwriting risk and therefore the loan attracts a lower interest rate compared to the second charge bridging loan option.
Second Charge Bridging Loans
Here, the lender takes second charge after the existing first charge lender in the loan agreement. The loan usually span through a short period of time; specifically for less than 12 months. The arrangement carries a higher risk of default, therefore a higher interest rate. The fact is that the second charge loan lender would start recouping his payment from the client only after all liabilities accrued to the first charge loan lender have been paid off. Heads up, the bridging lender for the second charge loan has the same repossession rights as the first charge lender.
Also Read This: How to Get a Bridge Loan Bronx in One Day?
Bridge loans are best used to pursue real estate projects, especially when you are required to make a down payment for a new home. If you are a current homeowner in that situation, you are faced with an option of either to include a contingency plan in the contract for the intended home purchase, or get a loan to fund the down payment before the sale of the current home. Because most sellers might reject your contingency plan, most home buyers instead opt for bridge loans as an alternative. Proceeds from there are usually used to service down payment for the intended home purchase. This doesn’t mean other professionals apart from realtors cannot borrow bridge loan anyway. Most business owners and firms take bridge loans to finance working capital, therefore covering for utility bills, payroll, rent, and inventory expenses as they await long-term financing. It could be the next financing option that you need to try out.