Rapid access to capital sets successful real estate investors apart from the competition. With substantial governmental and institutional oversight, strict guidelines, and lengthy application processes, conventional mortgages and business loans through traditional lenders often lack the flexibility and speed necessary for investors to succeed in the fast-paced world of real estate.
That is why savvy investors turn to short-term bridge loans to finance a fix and flip rehabilitation or construction project. Unfortunately, many real estate beginners balk at the prospect of these short-term loans because of the average bridge loan rate (9% – 11%) compared to traditional mortgages (6.5% – 8%).
However, as experienced investors understand, short-term bridge financing is a temporary investment tool designed for fast purchase, rehab, and resale projects. And, with a proper strategy in place, short-term bridge loans are a financial gateway to greater investment prospects and business success.
Let’s discuss the ins and outs of short-term bridge loans and why interest rates shouldn’t be your key focus when shopping for a short-term financing option.
What is Short-Term Bridge Loan Financing
As their name suggests, short-term bridge loans are tailored for real estate transactions requiring swift execution. While these loans can be used to help homeowners seamlessly transition from their current home to a new property, they serve as a powerful financial tool for fix and flip investors looking to build or renovate and sell a property quickly. This is due, in most part, to the bridge loans’ flexibility and speed.
Unlike traditional mortgages, bridge loans can be approved and funded in a short amount of time. This benefit is priceless in a fast-paced real estate market, where opportunities can disappear just as quickly as they arrive.
Short-term bridge loans also offer flexible repayment terms. Many bridge loan lenders offer multiple repayment options, including interest-only payments and deferred principal payments. For real estate investors with a majority of their assets tied up in projects, the option to defer payments for a short amount of time is advantageous.
Bridge Loan Rates
Short-term bridge loan rates often come with higher rates because of the temporary nature of the loan. When comparing traditional term loans vs. bridge loans, novice investors focus too heavily on the rate number rather than the term. Traditional mortgage loan terms are often 15 to 30 years long, while the average bridge loan term limit is 12 months.
On paper, a 6.5% interest rate on a 30-year fixed-rate mortgage may appear more attractive than a 9.5% rate on a 12-month short-term bridge loan. In reality, a traditional mortgage will cost you over $127,000 in interest compared to just under $8,000 for a bridge loan.
Lowering Bridge Loan Rates
For fix and flip investors, the benefits of immediate, short-term bridge financing are obvious. And, if you understand the factors that influence bridge loan rates, you can help lower your rate options:
- Credit Score & Financial History: A good credit score and financial history can help increase loan amounts and lower bridge loan rates. This is because the higher your credit score, the less of a risk you are in the eyes of lenders. Most short-term bridge loan lenders require a minimum 660 FICO score, with many offering better rates for higher scores.
- Loan-to-Value & Loan-to-Cost Ratios: A property’s loan-to-value ratio, or LTV, is a metric used by lenders to compare the loan amount to a property’s current market value. A lower LTV often equates to less risk for lenders and a better interest rate for you. For residential real estate investments, lenders want to keep the LTV under 65 to 70%. The loan-to-cost ratio, or LTC, compares the loan amount to the total costs of an investment project. For lenders, a higher LTC means more renovation or building costs, typically a more risky investment. Brokers prefer short-term bridge projects with an LTC of 85% or lower. Therefore, the lower the LTC, the better the interest rate.
- Rehab/Construction Holdbacks: Private lenders have the flexibility to offer rehab or construction holdbacks–a portion of a loan reserved for renovation or construction costs. These tailored holdback options paint a clearer picture for lenders of where and how their financing is being used. It’s important to note that these portions of capital cannot be accessed until specific conditions are met, creating less risk for lenders and better rates for borrowers.
- Early Repayment: Unlike traditional lenders who penalize borrowers for early repayment, short-term bridge loans through private lenders come with no prepayment penalties. For fix and flip investors who acquire lump sums after the sale of property, bridge loan lenders encourage early repayment of the loan principle. This allows investors to avoid some of the interest rate costs.
- Finding the Right Lender: When it comes to determining who offers bridge loans, there are many options. However, finding the right short-term bridge loan lender requires research and shopping around. The average bridge loan rate today sits between 9% to 11%, with different lenders offering different starting rates. When shopping around, it’s important to find lenders who:
- Consider LTV and LTC
- Offer rehab or construction holdbacks
- Offer no prepayment penalties
While securing favorable short-term bridge loan rates can be beneficial for investors, they shouldn’t be the key focus for investors. Rather, investors should look for investment projects with a lower LTV and LTC. Additionally, partnering with reliable lenders who offer bridge loans with flexible financing options, like holdbacks and deferred payments, can help investors access more capital and unlock greater investment opportunities.
Finance of America Commercial: Your Short-Term Bridge Loan Partner
Finance of America Commercial (FACo) provides investors with the knowledge, experience, and capital necessary to meet and exceed their unique needs. Our Stabilized Bridge financing provides investors with the loan reliability and flexibility necessary to quickly and successfully fund residential real estate projects.
Ready to partner with the best residential capital provider for short-term bridge loans? CLICK HERE to schedule a FREE consultation with a FACo expert today.
