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Bridge loans let homebuyers take out a loan against their current home in order to make the down payment on their new home. A bridge loan may be a good option for you if you want to purchase a new home before your current home has sold. This form of financing may also be helpful to businesses that need to cover operating expenses while awaiting long-term funding.
When used for real estate, a bridge loan requires a borrower to pledge their current home or other assets as collateral to secure the debt—plus, the borrower must have at least 20% equity in that home. Bridge loans also tend to have high interest rates and only last for between six months and a year, so they’re best for borrowers who expect their current home to sell quickly.
Bridge loans allow homebuyers and businesses to quickly access funds for major purchases and investments by using their current assets as collateral. While bridge loans can be strategic for covering gaps in financing, they also come with drawbacks like high interest rates and short repayment periods. This article provides a complete guide on bridge loans to help you decide if they are a good idea for your situation.
What is a Bridge Loan?
A bridge loan is a short-term financing option that lets borrowers access funds using their current home real estate or other assets as collateral. Bridge loans are also known as bridging loans swing loans, gap financing and interim financing.
The loans typically last for 6 months to 1 year and help borrowers cover financing needs in the short period before they receive funds from the sale of assets or finalization of long-term financing. For example, homeowners can use bridge loans to make a down payment on a new house before selling their current home.
How Do Bridge Loans Work?
With a bridge loan, the lender provides a lump sum loan amount that the borrower must repay at the end of the short loan term Borrowers can qualify for a bridge loan if they have significant equity built up in their current home or other assets offered as collateral
For real estate bridge loans, borrowers must have at least 20% equity in their current property to qualify. The equity secures the bridge loan until the borrower can repay the debt using proceeds from the sale of their initial property.
Bridge loans typically have higher interest rates than alternatives like home equity lines of credit (HELOCs) or traditional mortgages. Rates range from 8.5% to 10.5% for real estate bridge loans and 15% to 24% for business bridge loans.
When to Use a Bridge Loan
The most common uses for bridge loans include:
- Buying a new home before selling your current house
- Covering business expenses while awaiting approval for a loan or line of credit
- Funding a time-sensitive real estate purchase or investment
- Paying business operating costs during slow sales cycles or seasons
Bridge loans allow borrowers to quickly capitalize on opportunities even when their current assets or financing sources are tied up. The loans provide immediate access to capital that has to be repaid once long-term financing comes through.
Pros and Cons of Bridge Loans
Bridge loans offer several advantages but also come with drawbacks to consider.
Pros
- Quick access to capital
- Flexibility in real estate transactions
- Faster application and funding than traditional loans
- Allows borrowers to compete in fast-moving housing markets
Cons
- Carry higher interest rates than alternatives like HELOCs
- Require 20% equity in collateral assets
- Are secured debt, putting your home or assets at risk
- Short 6-12 month repayment periods
Bridge Loan Costs and Fees
Bridge loans typically come with the following costs and fees:
- Interest rates – 8.5% to 10.5% for real estate, 15% to 24% for business
- Origination fee – Up to 2% of loan amount
- Closing costs – 1.5% to 3% of loan amount
- Appraisal fee
- Admin fees
- Escrow fees
- Title fees
These costs make bridge loans one of the more expensive financing options. However, borrowers gain the ability to quickly capitalize on real estate investments and opportunities.
Alternatives to Bridge Loans
Several options provide more affordable long-term financing than bridge loans:
- HELOCs – Lower interest rates and longer repayment periods
- Home equity loans – Also have lower rates and longer terms
- 80-10-10 loans – Finance 80% of home with 1st mortgage and 10% with 2nd mortgage
- Business lines of credit – Revolving credit lines with lower rates
These alternatives come with less risk than bridge loans since borrowers aren’t required to repay the full balance within 6-12 months before selling their collateral assets.
Tips for Getting a Bridge Loan
If you decide a bridge loan is the best option for your situation, here are some tips:
- Shop lenders to compare loan terms, rates and fees
- Ask lenders if you can make interest-only payments during the loan term
- See if lenders will extend the loan term beyond 12 months
- Only borrow what you need to minimize interest costs
- Have a solid exit strategy to repay the loan when due
The Bottom Line – Are Bridge Loans a Good Idea?
While bridge loans allow borrowers to quickly access capital for major purchases and investments, the high interest rates, short repayment periods, and strict qualification requirements make them a very risky financing option.
Bridge loans are best for borrowers who need immediate funds, have at least 20% equity in their collateral assets, and have a clear exit strategy to repay the loan within 6-12 months. Otherwise, alternatives like HELOCs, home equity loans, and business lines of credit provide safer and more affordable long-term financing.
Frequently Asked Questions (FAQs)
How long do you have to pay back a bridge loan?
Most bridge loans have repayment terms of 6 months to 1 year. Borrowers must repay the full loan balance when the term ends.
Can you get a bridge loan for a down payment?
Yes, bridge loans allow borrowers to use their current home equity to fund a down payment on a new property before selling their existing home.
What are the requirements for a bridge loan?
Bridge loan requirements include good credit, sufficient equity in your collateral assets (at least 20% for real estate), steady income, and a clear exit strategy to repay the loan.
Are bridge loans risky?
Bridge loans carry more risk than alternatives because they are secured debt with short 6-12 month repayment periods. Borrowers can lose their collateral assets like a home if they cannot repay in full promptly.
How much does a bridge loan cost?
Bridge loans have high interest rates ranging from 8.5% to 24%, as well as closing costs and fees totaling 1.5% to 3% of the loan amount. This makes them one of the most expensive financing options.
What are some alternatives to bridge loans?
Alternatives like HELOCs, home equity loans, and business lines of credit provide more affordable long-term financing than bridge loans. They come with lower rates and longer repayment periods.
How Bridge Lending Works
Often when a homeowner decides to sell their current home and purchase a new one, it can be difficult to first secure a contract to sell the home and then close on a new one within the same period. What’s more, a homeowner may be unable to make a down payment on the second home before receiving money from the sale of their first home. In this case, the homeowner can take out a bridge loan against their current home to cover the down payment on their new home.
In this situation, a homeowner can work with their current mortgage lender to obtain a short, six- to 12-month loan to “bridge the gap” between the new purchase and the sale of their old home. Not all traditional mortgage lenders make bridge loans, but they’re more commonly offered by online lenders. Although bridge loans are secured by the borrower’s home, they often have higher interest rates than other financing options—like home equity lines of credit—because of the short loan term.
Once the borrower’s first home is sold, they can use the proceeds to pay off the bridge loan and they will be left with just the mortgage on their new property. However, if the borrower’s home does not sell within the brief loan term, they will be responsible for making payments on their first mortgage, the mortgage on their new home and the bridge loan. This makes bridge loans a risky option for homeowners who aren’t likely to sell their home in a very short amount of time.
Business Line of Credit
A business line of credit is a revolving loan that businesses can access to cover short-term expenses. Unlike bridge loans, lines of credit are not issued in a lump sum, so the borrower only pays interest on what they actually draw against the line. Loan terms generally range from a few months up to 10 years, and interest rates—which vary by lender—can be as low as 7% from traditional banks.
However, keep in mind that it can be very difficult to get a business line of credit from a traditional bank, and online lenders impose higher rates ranging anywhere from 4.8% to 99%. For that reason, business lines of credit should only be used to address very short term needs like restocking inventory or covering unanticipated expenses.