3 Differences Between A Bridge Loan And A Fix And Flip Loan
As the name suggests, a bridge loan is meant to "bridge the gap" between two different financial situations. For example, if you're a small business owner who is in the process of moving locations, a bridge loan can help you cover the costs associated with both your old and new property until your business is up and running at the new location.
A fix-and-flip loan, on the other hand, is a short-term loan that helps investors purchase and renovate a property before flipping it for a profit. Because these loans are usually interest-only loans with terms that last anywhere from 6 to 24 months, they're perfect for investors who want to minimize their carrying costs while they work on getting the property ready to sell.
Now that we've addressed what each type of loan is used for, let's take a more in-depth look at the three main differences between bridge loans and fix and flip loans.
One of the most significant differences between bridge loans and fix and flip loans is the interest rate. In general, bridge loans have higher interest rates than fix and flip loans because they're considered to be higher risk. Given that bridge loans are often used to finance properties that need significant repairs or renovations, lenders see them as riskier ventures than fix and flips—which are typically only minor cosmetic upgrades.
As a result, borrowers can expect to pay interest rates that range from 8% to 12% for bridge loans, whereas fix and flip loans typically have interest rates that fall somewhere between 5% and 7%.
Another key difference between these two types of loans is the loan term. Bridge loans are typically shorter in terms of length—anywhere from 6 months to 3 years—whereas fix and flip loans tend to have terms that last a bit longer, usually around 12 months. This difference in loan terms can be attributed to the fact that borrowers usually don't take as long to complete renovations on a property when they're taking out a fix and flip loan. Additionally, because most investors plan to sell the property soon after renovation work has been completed, there's less risk involved for lenders.
Down Payment Requirements
The final key difference between bridge loans and fix and flip loans has to do with down payment requirements. In general, borrowers will need to put down 20% of the purchase price when taking out a bridge loan, whereas those taking out a fix and flip loan may only be required to put down 10%. The reason for this difference is twofold: first, because bridge loans are used to finance properties that often require significant repairs or renovations, lenders see them as being riskier ventures; secondly, because most investors plan on selling the property soon after completing renovations (i.e., within 6 months to 1 year), there's less time for something to go wrong which could result in defaulting on the loan.
Bridge Loans VS Fix And Flip Loans: Which Is Right For You?
The type of loan you choose will depend on your specific needs and objectives. If you're looking for a short-term loan with flexible repayment options to help you finance a property in need of significant repairs or renovations, then a bridge loan is likely your best bet. However, if you're looking for a slightly longer-term loan (12 months or less) with lower interest rates to help you finance cosmetic upgrades on a property with good bones, then a fix-and-flip loan might be right for you. No matter what type of loan you decide on, make sure you do your homework so that you understand all of the terms and conditions before signing on the dotted line!
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