January 3, 2023

Bridge vs Permanent Loans - Pros & Cons

Learn the benefits and challenges of both options. Ask our team which is better for your property and goals.

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When it comes to financing a commercial real estate property, borrowers have a few different options to choose from. One option is a permanent financing mortgage, which is a long-term loan that is used to finance the purchase of a property. Another option is a bridge loan, which is a short-term loan that is used to bridge the gap between the purchase of a property and the availability of long-term financing.

Here are some of the pros and cons of a permanent financing mortgage compared to a bridge loan:

Pros of a permanent financing mortgage:

1. Long-term financing: A permanent financing mortgage is a long-term loan, which can provide borrowers with stability and predictability.Typical permanent financing loan terms are 5, 7 or 10 years.

2. Lower interest rates: Permanent financing mortgages typically have lower interest rates than bridge loans, which can save borrowers money over the long term. These interest rates are generally a spread over the US Treasury rate or Swap rate.

3. More time to repay: Permanent financing mortgages also have longer repayment terms, which can give borrowers more time to pay off the loan. Most loan terms are 25 or 30 year amortizations.

4. Recourse: Most permanent financing loans are non-recourse which means the borrower does not provide a personal guarantee. On large loans, this can be a significant benefit that helps keep the borrower's personal assets off the hook in the event the property is not able to cover it's debt service.

Cons of a permanent financing mortgage:

1. Creditworthiness: In order to qualify for a permanent financing mortgage, borrowers must typically have financial stability. Past credit issues like bankruptcy or foreclosures may not be dealbreakers but, it is important to provide context and a story about that event/ time period.

2. Closing time: Permanent financing is about 30-45 days from start to finish. For borrowers looking to close in a quicker timeframe, this may not be the best solution.

3. Prepayment penalties: Most permanent financing mortgages have prepayment penalties associated with prepaying the loan prior to it's maturity. Some prepayment options may be structured as stepdown, for example, 5%-4%-3%-2%-1%, or as yield maintenance or defeasance.

Pros of a bridge loan:

1. Speed: One of the main advantages of a bridge loan is that it can be obtained quickly. This is particularly useful for borrowers who need to act fast to secure a property but are not yet ready to commit to a long-term loan.

2. Flexibility: A bridge loan is also a flexible financing option. It can be used to finance a variety of different types of commercial real estate properties, including office buildings, retail centers, and multifamily properties.

Cons of a bridge loan:

1. Short-term financing: A bridge loan is a short-term loan, which means that borrowers will eventually need to secure a permanent financing mortgage to pay it off.

2. Higher interest rates: Bridge loans typically have higher interest rates than permanent financing mortgages, which can be a drawback for borrowers.

Working with a team that help you navigate the process and determine which option is better for you based on your goals and strategy can save you time, money and headaches.

Get in touch here.