The Bridge Loan Interest Rate: What Should You Expect?

By February 28, 2022 Real Estate Investor Tips

If you are looking to purchase real estate as an investment but don’t want to buy it outright with cash, a bridge loan might be the right choice. This can be a great option if you’re looking to buy an investment property to fix up and either refinance or sell.

These short-term loans can be well suited for fix and flip properties. Though they tend to have higher interest rates than other types of loans, they are appealing because of how much faster they allow you to access the funds you need.

So, what should you expect when it comes to a bridge loan interest rate?

Let’s take a look at everything you need to know.

What Is a Bridge Loan?

Bridge loans are a way to access immediate cash flow in order to meet current obligations. These are short-term loans that individuals or businesses can use until they remove an existing obligation or secure permanent financing.

This type of loan usually has terms of only up to one year. They are also generally backed by some form of collateral such as inventory or real estate and tend to have higher interest rates.

You might hear bridge loans also referred to as bridging loans or bridge financing. Other terms include gap financing, interim financing, or swing loans.

Want to know more about the basics of bridge loans? Check out our bridge loan introduction here.

How Does a Bridge Loan Work?

Bridge loans help to solve the problem of needing financing but not yet having access to it. These loans can be used by entities (professional real estate investors) and lenders are able to offer customized loans for different circumstances.

Bridge loans tend to have a higher interest rate than other options, for example, a HELOC or home equity line of credit.

Bridge loans are predominantly used by real estate investors who need quick access to cash in order to buy an investment property.

Bridge Loan Interest Rate: What to Expect

Bridge loan interest rates can be as high as 8% to 12%. Your exact interest rate for a bridge loan will depend on your credit profile and the amount of money you are borrowing.

Additional fees for taking out a bridge loan include closing costs. These usually amount to 2% to 5% of the loan amount.

Some of the additional fees that might be charged as a part of taking out a bridge loan include:

  • An administration fee
  • Wiring fees
  • An appraisal fee
  • A title policy fee
  • Notary fees
  • Escrow fees

Bridge loans also typically have a loan origination fee.

You will want to avoid any lenders that require a deposit for a bridge loan upfront. Instead, lenders should only ask for all of the associated fees at the closing.

It’s important to understand that terms can vary between locations and lenders. On top of that, interest rates can also fluctuate.

The Difference Between Traditional Loans and Bridge Loans

The process for getting a bridge loan is usually faster than getting a traditional loan. The trade-off is that they tend to have higher interest rates, large origination fees, and relatively short terms. For many borrowers, though, these terms are acceptable because of their need for convenient, fast access to funds.

Bridge loan borrowers are typically willing to pay the high-interest rates associated with this type of loan because they plan to pay it off with low-interest, long-term financing as soon as possible. There also aren’t usually prepayment penalties for bridge loans.

The Pros and Cons of Bridge Loans

There are both advantages and disadvantages to bridge loans, just as there are with all types of loans.

Bridge loans work best for buyers purchasing an investment property. It can give you the quick access to cash you need when you want to fix up a property to sell or refinance and rent out.

Some of the drawbacks of this type of loan are that it tends to be more expensive than a home equity loan and that you might have to juggle two or more loans at once. However, bridge loans can offer more benefits for some borrowers than home equity loans.

Lastly, it’s common for lenders to deny home equity loan applications for a property that is on the market.

Why Should You Choose a Bridge Loan?

Bridge loans can be a great choice for real estate investors that need cash fast to purchase a property. It can also be ideal for investors who have more than one project under their belt at the same time.

These loans tend to close much faster than other loans for investment properties. If you have another investment property that you intend to sell but you plan on buying a new property first, a bridge loan can help to bridge the gap. Similarly, this can be a useful type of loan if you are planning on flipping two separate properties at the same time.

One of the main reasons to choose a bridge loan for your investment property is because they are so flexible when compared to other options.

Alternatives to Bridge Loans for Real Estate Investors

If you don’t have the cash for a down payment to buy an investment property, there are a number of different options in addition to bridge loans.

A few of these options include tapping into your home equity, private money loans, and a hard money loan.

Tapping Into Home Equity

Home equity loans provide a lump-sum payment that you can borrow against your current home’s equity. This type of loan usually allows repayment up to twenty years and tends to have favorable interest rates. A home equity line of credit is quite similar to a home equity loan in that your home acts as collateral.

However, this type of line of credit acts like a credit card rather than a lump sum of cash. With a HELOC, you only pay interest on the money that you access. You might find that the interest rate for this type of financing is also more favorable than a bridge loan.

If you happen to be selling your personal property at the same time you plan on buying an investment property, though, the catch is that many lenders won’t extend a HELOC if you are selling your home.

80-10-10 Loan

An 80-10-10 loan is a mortgage structured in a way that lets you piggyback a second mortgage with a main mortgage. This type of loan can be favorable because it avoids the need for a jumbo loan and keeps you from having to pay mortgage insurance. However, it can also come along with variable interest rates on the second loan and make it difficult to refinance in the future.

This option only really works if you do have some cash on hand, though. Basically, this is a way to put less than 20% down on your new home while avoiding paying for private mortgage insurance. With this type of loan, the main mortgage is taken out for 80% of the new home’s price and then an additional second mortgage is taken out for another 10% of the purchase price.

Business Line of Credit

A business line of credit is available to business owners and works a lot like a home equity line of credit. Different lenders will offer different loan terms, but it’s common to have terms as long as ten years. While there are some advantages to a business line of credit, they can have a higher interest rate than bridge loans and they can be more difficult to get.

Personal, Private, or Hard Money Loan

A personal loan can be a reasonable option if you have a favorable DTI and good credit. The interest rates on bridge loans can be better than those you’ll get with a bridge loan mortgage. However, the conditions and terms of personal loans can vary widely depending on the lender you are working with.

You can also try to get a private loan from friends or family members. It’s also possible to find individuals that might be interested in a private money loan in your local real estate investment network.

Lastly, there are also hard money loans. Many bridge loans are hard money loans, but not all hard money loans are bridge loans. Basically, this is a short-term loan that is best for when you are planning on flipping an investment property. It is less ideal for instances where you want to rent out a property, develop it, or buy and hold.

Why Bridge Loans Can Be a Good Choice for Real Estate Investors

The first reason that this is the case is that they are straightforward and easy. It is usually faster to apply and get approved for this kind of loan. The shorter-term is often appealing to real estate investors who are financing an investment or fixing and flipping a home quickly.

Bridge loans let real estate investors get access to funds much more quickly than with conventional loans. There are fewer restrictions, underwriting, and guidelines for bridge loans to help move the process along.

A bridge loan can be particularly useful in the hot real estate market we find ourselves in now. When there is such a demand for real estate, you need to stay on top of the ball to get the perfect investment property. Getting a bridge loan can help ensure that you have the cash you need for a down payment quickly so you can move forward with the purchase.

Are you wondering what types of financing is available for rental properties? Check out this guide to learn more.

The Criteria for Taking Out a Bridge Loan

At LendSimpli, we can tailor a loan to fit your real estate investment purchase and rehab. We will fund your deal if you and your property meet our qualifications!

In order to qualify, the property can be either a single-family with between one and four units or a multifamily with between five and twenty units. We fund projects that aren’t owner-occupied but rather being purchased as an investment. The loan amounts we offer range from $75,000 to $2 million.

We offer term lengths between twelve and twenty-four months with rates starting at 8.5%. You can learn more about additional criteria for qualification here.

Applying for a bridge loan with LendSimpli is, well, simple! All you need to do is upload a handful of documents into our secure borrower portal. Here you’ll also be able to communicate with the underwriting team.

One of the things that make LendSimpli stand out as a bridge loan lender is that we provide financing on both the acquisition and the rehab of your property.

(Are you scouring the internet for house flipping tips? If so, be sure to check these out!)

Bridge Loans: Are They Right for You?

As you can see, bridge loans are an appealing option for real estate investors in certain circumstances. With a bridge loan, you can easily access the funds that you need in order to keep your real estate purchase moving forward. Since these loans are shorter-term and tend to have higher interest rates than other types of loans, the process for obtaining a bridge loan is quick and easy.

Whether or not a bridge loan is the right thing for you depends on your personal circumstances. It’s important to evaluate the fees and how long you expect it will take you to pay back the loan before taking it on. Some individuals might find that a bridge loan offers them exactly what they need, when they need it, while others might determine that there is a more affordable option given their particular circumstances.

Are you ready to start the loan application process? If so, click here to begin!