The Basics of Bridge Loans

Do you have any idea what bridge loans are? How about this: what comes to mind when you hear the word bridge? Probably something that connects to locations right? That’s the same concept basically. Investopedia defines bridge loans as a type of short-term loan that you can use in order to remove an existing debt or help you get by until you are able to obtain better financing. Thus business books often associate the term with “interim financing.”

Let’s look at an example so that we can understand the concept better. Generally loans are financed by banks or insurance companies. These types of loans often have terms that can last for as short as 5 years to something as long as 30 years. Bridge loans meanwhile are often funded by hard money lenders or even private money lenders. Compared to a traditional loan, these loans have high interest rates but are compensated for the short time they can be acquired.

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Going back to our example, say a company has managed to equity financing from a bank. However said financing is expected to close in a year. Unless the company is able to get money within this time period, then it will be in trouble. This is where bridge loans come in. By getting one, the company will have the necessary working capital it needs until the financing pushes through.

So what other reasons require you to apply for such? This time instead of a company, let us look at an individual as an example. Say that person has a property that is currently facing issues with regards to upkeep. The mortgage is due in three months and if not paid, the property enters into foreclosure. By a stroke of luck, the owner manages to sell the property. However the only buyer will only agree to a payment in five months? To address this problem, the owner can enter into such a loan to ensure that the property is not foreclosed and the sale pushes through.

There are many private money lenders that offer such a loan. In Denver, one such company is Montegra Capital Resources Ltd. (www.montegra.com). They offer short term loans with interest between 9% and 11%. If you think that the interest seems a bit high, they have flexible terms that can suit your needs. Further the bridge loans that they offer are usually paid “interest only” which means that they can actually help in minimizing your monthly dues.

With these types of terms, it is no wonder that they have gained popularity especially in the real estate industry. Another reason to their popularity is that unlike banks, private money lenders rarely set minimums or other ratios that the borrower needs to comply with. In addition these loans close quickly unlike those that you apply for in banks. For Montegra Capital, the loans usually close around 4 weeks from the time of the application. Indeed bridge loans have become a great help especially when it comes to protecting and improving real estate.