Construction financing is a short-term loan used by borrowers to finance the costs of building from the ground up. The loan terms depend on the product type and the amount of time it takes to complete the building process. For most construction loans the borrower is required to provide some level of recourse.
Bridge loans are flexible short-term financings that may include an unusual or complex component to the transaction. This type of financing enables the borrower with the necessary time frame to reposition and stabilize a property. Then a longer-term loan will be arranged to pay off the bridge loan. Bridge loans offer several advantages. For example, they can allow borrowers to achieve higher leverage, and often have limited or no prepayment penalties. The duration of bridge loans is usually six months to five years.
Permanent loans are the most common type of senior debt in the commercial real estate industry. Permanent loans usually enjoy the lowest interest rates among the various type of commercial real estate loans. Borrowers can arrange loans with terms from 5 years to 30 years, based on the property type. Permanent loan programs provide the most sophisticated and flexible long-term financing solutions for the commercial mortgage industry.
Floating rate loans: If a loan has a floating interest rate, then the interest rate fluctuates over the duration of the loan. Floating rates typically fluctuate with the overall market, with an underlying index, or with the prime rate. The primary advantage of a floating interest rate is that it moves with the market rates. Of course, this can also be a disadvantage, depending on which way the market rates move.
Fixed rate loans: If the loan has a fixed interest rate, the interest rate remains constant for the duration of the loan. The primary advantage of a fixed interest rate loan is the elimination of uncertainty. Once the loan agreement is finalized, the value of the future interest payments is known.