A Bridge loan is a type of short term financing that is offered by individuals and not banks. However, their interest rates are normally higher than those offered by banks. Hard money loans on the other hand refers to loans that are provided against a real estate parcel as security. Hard money loans like bridge loans are normally provided by private individuals.
Because the interest rates are higher and the durations are short, in many cases these loans are meant to finance short term projects that go for several months or just a couple of years. The difference between bridge loans and hard money loans is that bridge loans are normally slated for commercial investments that may not have yet qualified for traditional loans. Hard money on the other hand are for commonly used for distressed situations like foreclosures, where the property is used as security, but also for individuals in need of fast financing for rehabs, fix and flips, etc.
Advantages of Bridge Loans and Hard Money
• When the traditional banks cannot close the deal for you, you will still be able to get financing. Traditional lending involves a lot of procedures and paperwork, bridge and hard money loans take very short periods of time and you will have your cash much faster.
• Bridge loans can sustain you till you sell the property. If you wish to sell your property and you anticipate it taking several months, the best option for you is a bridge loan.
• The loan repayment options are flexible. You are supposed to show that your income, investment will be adequate to repay the loan. However, you can make use of an interest reserve if you have enough equity in the property for you to be given a bigger loan.
• With bridge loans, the rules are not fixed. As long as you are able to convince the lenders, they will grant you the loan based on judgment unlike the traditional banks where there are fixed procedures for loans
• Hard money on the other hand is very advantageous for investors and rehabbers who are interested in obtaining financing quickly to satisfy their project needs.
Disadvantages of Bridge Loans and Hard Money Loans.
Lenders of hard money focus on loan-to-value ratios. Most lenders of hard money usually give loans that are a max of 80% of the value of a home. Furthermore, due to the short nature of the loan, hard money loans and bridge loans are often tied to high interest rates (12%+ is not uncommon), as well as fees normally assessed as points during the lending process.
One can expect to pay as much as 5 points (5%) of the total cost of the loan with some hard money lenders in Arizona. This means that a 250K loan can result in as much as $12,500 in points and fees. This may seem like a lot, but for the individual in need of quick financing, terms like these are accepted in order to close the deal.