How and When are Bridge and Construction Loans Used?

Let’s say that you see a great piece of land or a building and you want to buy it. The problem is the property you own now has to be sold first, for you to have the funds to buy the new property, and there is no timetable on when your current property may sell. Still, you don’t want to lose a great deal on the new property.

Enter the Bridge Loan

This is where a bridge loan comes in. A bridge loan is a very short term loan, usually not longer than a year, that allows you to buy property or do other things with the loan, while you’re waiting for something else to happen—usually an influx of money from a sale of your own current property, or perhaps, for a big payment to be made from a client or customer of yours.

Bridge loans aren’t traditional in the sense that they can vary in payment types, frequency, and amounts. Some may not even have payments, but may just have a lump sum due at the end of the loan’s term, but most are a mix of payments and a larger lump sum payment at the expiration of the loan.

Interest Rates

Bridge loans have much higher interest rates than traditional loans, so they aren’t loans that are intended to be used long term. You’ll have to do your own calculations to see whether the increased interest on the bridge loan warrants or justifies the return you will see on whatever property you are buying.

In most cases, bridge loans are taken out with the idea of getting longer term financing at some point, to pay off the higher interest bridge loan.

Use in Construction

Bridge loans are used in the construction industry, to fund the early stages of construction—usually, the stages that happen before an initial payment is made by an owner or from whomever the build is being done for. It can allow a construction company to start on a project early and cover costs at the first stages of building.

Construction Loans

Bridge loans are often confused with construction loans, and they do have some similarities. But while bridge loans usually are secured by property that’s already there—say, a second mortgage on property you already own—construction loans can be used to build brand new property, sometimes, even when you don’t currently have collateral to put up as security for the loan.

For example, if you just had land that you wanted to build on, and there is no physical structure to secure a bridge loan, a construction loan may be a better option. Things like equipment, paying contractors, or the cost of purchasing the and itself can be used with a construction loan.

Construction loans don’t pay out to you all at once however, they are often staggered, and paid to you as certain construction milestones are met on a project.

Legal questions about your construction project? Call our Fort Lauderdale business lawyers at Sweeney Law P.A. at 954-440-3993.

Source:

rocketmortgage.com/learn/bridge-loan