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Bridge Loan vs Construction Loan: What’s the Difference?

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When it comes to real estate lending, there are many different loan options available. This allows a borrower to choose the best loan that works for them based on the size and cost of the purchase or project, as well as their available cash, other capital and their credit history. Understanding the differences between the different types of real estate loans available can help you decide which one works best for you.

For most hard money lenders in California, bridge loans and construction loans are two of the loans that they handle. If you are looking for a real estate loan, whether for investment, commercial or residential, understanding these types of loans and how they are different is critical.

Bridge Loans

A bridge loan fills a simple yet important need in real estate: if you are selling your primary residence and buying a new one, you are probably going to need cash on hand to purchase your new property. One solution is to sell your house first, find temporary housing while you look for a new property, and then use the cash from your old house to buy the new one.

This process is complicated and requires you to move two times, as well as to go through the trouble of finding a temporary place to live while the transaction goes through. Bridge loan lenders offer a simple solution to this: you can take out a short-term loan to provide you with the cash on hand necessary to purchase your new property before your old property is sold.

Terms of Bridge Loans

Since this type of loan is intended to be a short-term solution, loan terms are typically no longer than six months. They also come with higher interest rates than most conventional loans.

Construction Loans

Like bridge loans, construction loans are taken against the value of your property in order to fund new investments. The primary difference is what specific type of investment is being funded; by nature, construction projects have more risk involved than simply buying a property. This informs how the loan is constructed. Los Angeles hard money lenders typically structure a construction loan based around construction reserve accounts, which fund the project based on the value of the property and the estimated risk involved (about 10 percent of the loan cost is meant to cover potential costs associated with risk). Loan rates are typically 10 to 15 percent, and payment terms are usually between 6 and 18 months. While construction loan terms can be longer than typical bridge loan terms, both are short-term loans intended to fund short term projects.

The primary difference between bridge and construction loans is what you are using the money for. In order to determine which kind of loan you need, look at what your investment goals are; costs will differ depending on if you are buying a new property, building a new structure on a property or merely renovating an already-existing structure. Contact a lender to find out what rates and terms you qualify for.

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