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What is a bridge loan?
A bridge loan, also called a swing loan or gap financing, is a short-term loan used to buy assets or covers obligations until longer-term financing is found. Both consumers and businesses use bridge loans. Homebuyers often use bridge loans to cover the purchase of a new property before the sale of the prior home, while businesses use them to buy assets or provide cash flow in times of stress.
Bridge loans carry relatively high interest rates and usually have a term of six months to two or three years. These loans can remove the financial obligation from a previous loan or provide immediate funds to the borrower. They bridge the gap when financing is necessary but a favorable interest rate is not immediately available. They are a form of secured debt, backed by collateral.
In real estate transactions, bridge loans are used to quickly close on a deal before a long-term loan or mortgage with a lower interest rate is obtained. When a homebuyer wants to purchase a new property before the sale of her prior home closes, a bridge loan can be used to pay off the old mortgage and purchase the new home. Lenders only grant bridge loans to borrowers with very good credit, and the loan is seldom for more than 80 percent of the value of the combined properties, requiring the borrower to have a high level of equity in the property they are selling.
In commercial real estate transactions, bridge financing gives buyers the flexibility they need to quickly take advantage of short-term opportunities. Most often, bridge loans are used to buy a property that needs significant upgrades or renovations before lenders will consider offering longer-term, lower-interest financing.
Bridge loans are used in commercial financing. Businesses can use inventory or other assets to back a fast loan to buy additional inventory or make repairs before meeting their sales goals. They also may need a bridge loan while waiting for new financing to arrive from investors.
Bridge loans give you the flexibility you need to buy your dream home. We’ve got the tools you need to find the right mortgage.
Bridge loan example
Tim and Jane have $150,000 left on the mortgage for their current home and they need $50,000 for a down payment on a new home. Their current home is valued at $350,000, so they take out a bridge loan, with a plan to pay it off from the proceeds of their old home’s sale. Once they sell their old home, they can pay off their old mortgage as well as the bridge loan, including accrued interest, from the sale.