From conventional to creative financing, these days there are so many different types of loans for investors to choose from. All the terminology, options, and knowing how to pick the right one for your needs can be confusing and overwhelming, especially when you’re first starting out. One of the common questions that comes up when looking for hard money is “what’s the difference between a “bridge loan” and a “hard money loan?”” and which one is the best fit for my project?
To answer these questions, we’ll need to define the two loan types and see what they have in common and how they differ.
Hard money loan: a privately funded, short-term loan used as an alternative to conventional financing.
Bridge loan: as follows right from the name, it is a short-term loan intended to “bridge” the gap in financing until a longer-term loan can be secured.
How are they the same?
Both are secured by real property and can be based solely on the value of the property being loaned against without much consideration given to the borrower’s income or credit score. For this reason, they can usually be obtained very quickly (on average, between 3-7 days).
Both are short-term, or temporary, typically between 6-18 months (albeit some can be shorter or longer depending on your lender and particular project). This makes these loans ideal for fix-and-flip projects or other situations in which a borrower plans to quickly resell or refinance a property.
Both offer flexible repayment terms, which the lender can structure to fit the borrower’s circumstances. These types of loans are usually interest-only and don’t have any prepayment penalties, allowing the borrower to pay off as soon as their property is sold or refinanced without fear of incurring additional fees.
Although both of these loan types allow more flexibility, shorter terms, and faster approval times, this convenience comes at a price: they are usually offered at interest rates that are higher than conventional loans.
How are they different?
While hard money loans are only ever financed by private lenders, bridge loans can be offered by both private and conventional lenders. This means that a bridge loan secured by hard money is also a hard money loan, but this is not always true the other way around. Not all bridge loans are hard money loans as there are banks that will provide bridge financing for certain projects. Have we lost you yet??
Why, might you ask, would someone use hard money instead of conventional financing as their bridge loan? Like most things in business, it boils down to time and money. Although interest rates on bank loans are much lower than on hard money loans, the process of getting a conventional loan takes longer and involves a more rigorous underwriting. Hard money loans are easier and faster to secure but, once again, they come at higher costs.
Which loan type is better?
The answer is – it depends. There’s no “right” loan type as it will vary based on your specific project. For example, if you are looking for quick funding to purchase a property in a competitive market and then refinance it with a conventional loan, a bridge loan might be your best bet. However, if you plan to fix and flip the property, especially if you need financing for the rehab costs, hard money will likely be the better option.
We hope our explanations have been helpful in making your decision on which loan type is best suited for your needs. If you are still unsure, feel free to reach out to one of our associates. At BorrowLabs, we have extensive experience with both types of products and can assist you in securing the right financing for your deal.