This tool figures monthly payments on a bridge loan, offering payment amounts for P&I, Interest-Only and Balloon repayments — along with providing a monthly amortization schedule. This calculator automatically figures the balloon payment based on the entered loan amortization period. If you make interest-only payments then your monthly payments will be the interest-only payment amount below with the balloon payment being the original amount borrowed.
|Bridge Loan & Commercial Mortgage Providers||Rates|
|Bridge Loans||6% - 10%|
|Freddie Mac Optigo||3.20% – 4.82%|
|Fannie Mae||3.25% – 4.26%|
|HUD 223(f)||2.35% – 2.75%|
|CMBS||2.81% – 4.58%|
|Regional Banks/Credit Unions||3.11% – 5.25%|
|Life Insurance Companies||3.00% – 5.00%|
|Debt Funds||4.42% – 10.07%|
|HUD 221(d)(4)||3.15% – 3.40%|
Note: The range of commercial mortgage rates should be considered typical. However, there are outliers on the high and low end of the range. Thus, these figures do not guarantee actual rates on a specific commercial mortgage deal. To see which options you qualify for & get the best deal you can we recommend contacting a commercial mortgage broker who can help you see what you qualify for.
Running a business entails making strategic plans and arranging your finances. It also involves acquiring the right commercial property that can host your operations. And to purchase an office, building, or retail property, business owners take advantage of commercial mortgages.
However, what if securing a commercial loan from a bank is not an option? If you’re looking for a flexible, short-term loan that can help you buy a new commercial property, there’s a way. This is where a bridge loans can finance your purchase while you’re looking for a long-term commercial loan.
Our guide below will discuss how commercial bridge loans work and when it makes sense to take this type of financing. We’ll also talk about its interest rate, payment structure, cost, as well as its pros and cons.
What are Bridge Loans?
Bridge loans, as the name indicates, are a type of financing that bridges the gap between a real estate purchase and long-term financing. It comes with short terms, 1 year to 3 years, and is secured by property signed as collateral for the mortgage. This type of loan is considered a “temporary loan” that helps business owners buy time to find an exit strategy, such as refinancing their loan or selling their existing property. If you’re looking for quick financing without the taxing approval process, this option might work for you.
In residential financing, bridge loans are used by homebuyers to purchase another house before they can sell their current home. Meanwhile, in commercial real estate, bridge loans are used by businesses to renovate their property or purchase a new one. Borrowers who cannot qualify yet for conventional commercial mortgages may apply for bridge loans.
Companies need considerable funds to boost their operations. And with improved service, this can translate into higher profits. But before reaching this goal, it helps to make major business upgrades. This can be done by renovating your commercial property, acquiring a new office, or moving to a more favorable location.
The following list shows how borrowers can utilize commercial bridge loans:
If you have an owner-occupied commercial property, you can use a bridge loan to rehabilitate your current premises. The bridge loan can fund the renovation work during the short term. Then, when you refinance, it can be replaced with a long-term mortgage that has more manageable payment terms. Refinancing helps you shift to a long-term mortgage that will restructure your payments to pay off your debt.
On Mortgage Refinancing
Refinancing is obtaining a new loan to replace your existing mortgage. This is an exit strategy you can take once the short term on a bridge loan is through. Refinancing is just like taking a new loan, which means you need to have a high credit score backed by a pristine financial background.
The bridge loan can be used as a down payment to purchase new location and pay off the remaining mortgage on your current property. If you don’t have time to raise down payment (when you need to time your purchase), bridge loans can work for you. Once the short term ends, you can refinance to a traditional commercial loan to pay your lender.
Borrowers can use a bridge loan to purchase new commercial property. Business owners may use this to acquire a commercial property before their competitor buys it first. Since approval is faster for a bridge loan, you can secure the property without waiting for months on a traditional commercial loan. Likewise, once you can arrange for refinancing before the short term ends, you can transition into a traditional commercial mortgage.
Commercial bridge loans are considered high-risk mortgages. This is due to the very short time frame given to borrowers to generate repayment. For this reason, interest rates for bridge loans are usually higher than traditional commercial mortgages.
Interest rates for bridge loans are generally based on the six-month LIBOR index and a spread of 4.5 – 5.5 points. But note that this estimate depends on the property and the lender.
Bridge Financing Interest Rates
Bridge loan interest rates typically range between 6% to 10%. Meanwhile, traditional commercial loan rates range from 1.176% to 12%. Borrowers can secure a lower interest rate with a traditional commercial loan, especially with a high credit score. However, that means enduring a long processing time of at least 3 months.
What do lenders look for? Approval for bridge financing is mainly based on the property and renovation plans. Lenders also evaluate the property’s real estate market before deciding to approve your loan.
Unlike traditional commercial lenders, bridge loan providers are not as strict with credit scores. You can obtain bridge financing if your credit score is below 680, but usually not lower than 650. Most lenders still check your credit report, but this is not the main basis for the loan’s approval. Checking your credit score merely verifies if you are qualified to refinance into a traditional commercial loan as an exit strategy.
As for down payment, lenders may require you to make a 20 percent to 30 percent down payment. This is similar to traditional commercial loans. However, depending on the lender, some may require higher down payment of 50 percent. So make sure you have enough funds to cover this cost.
When it comes to determining the loan amount, lenders evaluate a combination of the loan-to-cost (LTC) ratio and the loan-to-value (LTV) ratio. LTC is estimated based on the acquisition cost of the property along with the projected cost of renovation. Lenders typically offer loans with 65 percent to 80 percent LTC.
Furthermore, lenders also consider the after-repair-value (AVR) to determine the value of the loan. This includes the market value of the property once renovation is complete, together with the projected cash value generated by the completed property. Bridge loan lenders offer up to 80 percent LTV based on the property’s completed value.
Bridge loan lenders approve financing primarily on the basis of the after-repair-value (ARV). This percentage allows lenders to gauge the property’s future value over of its current price. This is in contrast to traditional commercial loans that lend based on loan-to-value ratio and creditworthiness.
Apart from ARV, bridge loan providers also assess the following qualifications:
DSCR is one of the most important indicators that lenders check. This measures your ability to repay your debt. DSCR is estimated by taking your property’s annual net operating income (NOI) and dividing it by the annual total debt service. Bridge loan providers usually require a DSCR of 1.1 percent to 1.25 percent.
Lenders check your financial records, including statements on all your principals. They evaluate these records to check your financial strength as an individual or group (if you have partners). If you are a group, they assess your collective net worth. Generally, lenders do not provide bridge loans that exceed an applicant’s total net worth.
Applicants and their partners must submit a company profile and business plan to the lender. This should demonstrate how much knowledge and experience you have in your field. Lenders also evaluate the strength of your business proposal, as well as similar projects you have completed successfully in the past. If you are a new business owner, this part may make it challenging to secure approval.
Get ready with the following documentation:
Bridge loans have a similar payment structure to traditional commercial loans, though with much shorter terms. Some bridge loans can be as short as 6 months, but most lenders offer 1 year to 3 year terms. These come with an interest-only payment, which means a borrower only has to cover monthly interest charges for the entire loan. Once the term is through, a balloon payment must be made to pay down the remaining balance.
To give an example, let’s suppose you took a bridge loan worth $900,000 with 9 percent APR. You must make a balloon payment by the end of the 2-year term. For this loan, the balloon payment is based on an amortization schedule with a 30-year term.
Using the calculator on top, let’s compute your monthly interest-only payment, principal and interest payment, and the total balloon payment.
Bridge loan amount: $900,000
Interest rate: 9% APR
Term: 2 years
|Principal and interest payment||$5,059.12|
Based on the results, your monthly interest-only payment will be $4,725.00. If you wish to make principal payments with interest, it will cost $5,059.12. By the end of the term, your total balloon payment will be $620,987.96.
A balloon payment is a one-time lump sum amount that pays down a mortgage. This is a huge sum, which makes it risky for lenders if you are not able to generate funds. Thus, it is imperative for a borrower to refinance, sell the property, or come up with sources of funding to pay down the loan.
Our calculator also estimates owner equity as well as the value of the property once the balloon payment is due. Moreover, it indicates your loan-to-value (LTV) ratio once you refinance by the end of the maturity date.
|Equity when balloon payment due||$423,960.04|
|Property value when balloon payment due||$1,044,948.00|
|LTV if refinanced when balloon payment is due||59.43%|
For this example, your equity will be $423,960.04 when the term ends. After two years, your property value will be worth $1,044,948.00. And if you refinanced by the end of the term, the LTV ratio will be at 59.43 percent.
Closed Bridging Loan These loans offer a predetermined fixed repayment period which lowers the risk to the lender, allowing them to offer competitive loan interest rates.
Open Bridging Loan These loans do not have a fixed repayment date. Bridging companies may deduct interest from the initial loan advance to limit their risks. These loans also tend to carry a higher rate of interest than closed bridging loans.
First Charge Bridging Loan Some properties secure multiple financing lines. A first charge gives the lender the senior position in the capital structure, allowing them to receive money before other lenders if the property goes into defaults.
Second Charge Bridging Loan This is a commercial loan which is similar to a traditional second mortgage on a residential property. It offers a higher rate of interest to compensate for the increased risk of loss during default as the lender is taking on greater underwriting risk.
Business owners who need quick financing to upgrade an office or purchase a commercial property can turn to bridge financing. However, before you jump the gun on this loan option, make sure to weigh the benefits and disadvantage of bridge financing.
Bridge financing is attractive to borrowers because of the fast processing time. You can obtain financing within a matter of weeks instead of 3 months with a traditional commercial loan. Next, the credit score requirement is not as high as commercial loans. It is also not the primary basis for loan approval. Instead, lenders base their loan approval on the future value of your property (after the balloon payment), your net worth, and your DSCR ratio.
The short term and fast financing also makes it disadvantageous. Bridge loans have reduced time frames to look for funds to repay the debt. It also comes with higher interest rates as a trade-off for the fast processing time. Bridge loan rates range between 6 percent to 10 percent. Likewise, the higher interest rates mean high monthly payments compared to traditional commercial loans.
Next, taking a bridge loan entails making sure you can repay the loan or refinance your mortgage. If you do not have enough income to pay back the loan, you must qualify for refinancing to shift to a traditional commercial loan. Finally, if you default on your mortgage, you stand to lose your property, leaving you empty handed.
The following table summarizes the pros and cons of choosing a commercial bridge loan:
|Allows you to qualify with a credit score below 680, but usually not lower than 650||Higher interest rates compared to traditional commercial financing|
|Comes with faster processing and approval compared to traditional commercial loans||Higher rates mean higher monthly payments|
|Allows you to take financing without turning to your business partners and relinquishing control of your business||The short term gives you reduced time to generate funds to repay the mortgage|
|Stabilizes your cash flow, bridge financing covers business costs while you’re waiting for payments||If you don’t have enough funds, you need to make sure you can refinance your loan before the term ends|
|Not exclusive to owner-occupied properties, can be used for investment properties for selling or leasing out||If you default on your loan, the lender will seize your property and sell it|
Hard-money loans typically are available for businesses who can afford a higher rate of interest but are looking for shorter loan terms. Businesses which have a strong financial foundation may qualify for commercial financing at lower rates. Bridge financing sits between the two, as far as loan term and interest rates go.
Bridge Loans and Hard Money Loans
Bridge loans are technically similar to hard money financing. They both have interest-only payment structures and short terms. However, hard money loans usually have higher interest rates between 10% to 18%. Bridge loans, on the other hand have slightly lower rates in the 6% to 10% range.
Borrowers looking to rehabilitate their business location or purchase a new commercial property can take advantage of bridge loans. Bridge loans are a type of short-term financing that provides you capital for property purchase or renovation. This “bridges the gap” while you’re looking for an exit strategy to repay your mortgage. Moreover, it provides faster financing compared to traditional commercial loans that take months to approve.
On the other hard, it has its trade-offs. Bridge loans come with higher interest rates and generally cost more compared to traditional commercial loans. And since your loan is secured by your property, you risk losing your office or building if you default on your loan. You must also make sure to have a sure fire exit strategy, such as refinancing or selling the property, to pay off your lender. So calculate your options carefully before committing to a bridge loan.