Bridge loans are also referred to as bridge financing, interim financing, swing loans, or gap financing. They’re a short-term financing tool that lets you borrow against your current asset. Homebuyers often take out a bridge loan against their current home to finance the down payment on their new home. Bridge loans typically let you borrow money for up to a year. Interest rates on bridge loans typically fall between 8.5% and 10.5%, which means they’re more costly than traditional forms of long-term financing. In this article, we’ll explain how bridge loans work, who offers them, the pros and cons, and whether they’re a good option for your financing needs. Different Types of Bridge Loans Bridge loans aren’t classified into specific categories. The differences between bridge loans often center around repayment method, loan term, and interest rate. For instance, there are different ways to repay the interest on your bridge loan. Some lenders prefer lump-sum payments at the end of the loan term. Others prefer monthly payments. Pros of Bridge Loans Although they’re more expensive than other forms of long-term financing, bridge loans present multiple benefits. Short time frame Bridge loans are a strictly short-term financing option. Unlike mortgages or college tuition loans, bridge loans require you to pay back your debt over a short amount of time. During that shorter period of time, it’s less likely that you’ll suffer financial hardship that makes it impossible to repay your loan. Speed The application and underwriting process for bridge loans is generally faster than it is for traditional loans. Additionally, it’s relatively easy to qualify for a bridge loan, assuming you qualify for a mortgage to purchase a new house. Flexible repayment options Bridge loans let you choose your repayment option. You can either repay your entire bridge loan before or after securing your permanent financing. If you repay your bridge loan before securing your permanent financing, your payments will be structured in a way that lets you fully repay your loan over a certain time period. Assuming you make your payments on time, your credit rating will improve, and you’ll qualify for long-term loans you’d otherwise be ineligible for. If you repay your bridge loan after securing your permanent financing, then a portion of your long-term funding will go towards repaying your bridge loan. Non-recourse Bridge loans are non-recourse loans, which means the lender can only seek repayment of the loan through the actual property. As the borrower, you’re not personally liable for repaying the outstanding loan balance. If you can’t repay your loan, the lender will only be able to claim your property as collateral. Cons of Bridge Loans Despite their benefits, bridge loans present a few disadvantages. Large payments Bridge loans require you to repay your loan over a shorter period of time than a mortgage or other long-term financing. That means you’ll pay back your bridge loan over larger payment installments. Bridge loans also tend to come with higher interest rates than long-term financing solutions. Less flexibility from lenders Because bridge loans are short-term loans, lenders are likely to be less flexible when it comes to payments. If you’re behind on your payments, be prepared for higher late fees and steeper penalties. Relies on more permanent financing Bridge loans rely on more permanent financing—they’re not a long-term financing solution. However, long-term financing isn’t always available. For instance, if the housing market collapses, you’ll be left without funding, scrambling to repay your bridge loan. Cost Last but not least, bridge loans can be expensive. In fact, bridge loans usually cost more than a traditional mortgage. Interest rates on bridge loans depend on i) your credit score and ii) the size of your loan. More on this below. Sound finances Lenders typically approve bridge loans if you present both strong and stable finances. Oftentimes lenders require a minimum credit score (the exact number might vary) and a certain debt-to-income ratio. Overall, if your financial situation isn’t solid, you’ll struggle to qualify for any type of bridge loan. Bridge Loans for Businesses Yes! Bridge loans aren’t just for private homeowners. Businesses can also use bridge loans to immediately purchase real estate or fund a short-term cost. Just like regular bridge loans, business bridge loans typically come with higher interest rates, but they allow quick access to capital than traditional financing. Some situations where your business might use a bridge loan include: To cover operating expenses while your business finalizes long-term financing. To obtain funds for an immediate real estate purchase. To capitalize on limited-time offers on business resources, inventory, etc. Bridge Loans Lenders You can obtain a bridge loan through a variety of different lends: banks, credit unions, and other financial institutions. That said, it’s most common to secure a bridge loan from your current mortgage provider. If you’re interested in a bridge loan, make sure you call your lender first. Additionally, while you search for a financial partner, avoid lenders who promise quick access to capital, lenders who charge high fees, or lenders who don’t have a quality track record. Bridge Loan Costs Bridge loans aren’t cheap. Although they’re a great way to obtain temporary financing for your new property, remember that bridge loans usually cost more than a traditional mortgage. Interest rates on bridge loans depend on i) your credit score and ii) the size of your loan. Overall, interest rates on bridge loans range from the prime rate (3.25%) to 8.5% or even 10.5%. Interest rates on business bridge loans range even higher, typically from 15% to 24%. In addition to your interest rate, you’ll need to pay legal and administrative fees, along with closing costs. Closing costs and fees for bridge loans hover around 1.5-3% of the total loan amount. These costs often include the following: Loan origination fee Appraisal fee Administration fee Escrow fee Title policy costs Notary fee Before you commit to a bridge loan, remember to consider all the associated costs! Bridge Loan Alternatives If you can’t access long-term financing, bridge loans can