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.