Bridge loans are also referred to as bridge financing, interim financing, swing loans, or gap financing.<\/p>\n
They\u2019re 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.<\/p>\n
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\u2019re more costly than traditional forms of long-term financing.<\/p>\n
In this article, we\u2019ll explain how bridge loans work, who offers them, the pros and cons, and whether they\u2019re a good option for your financing needs.<\/p>\n
Bridge loans aren\u2019t classified into specific categories. The differences between bridge loans often center around repayment method, loan term, and interest rate.<\/p>\n
For instance, there are different ways to repay the interest on your bridge loan.<\/p>\n
Some lenders prefer lump-sum payments at the end of the loan term. Others prefer monthly payments.<\/p>\n
Although they\u2019re more expensive than other forms of long-term financing, bridge loans present multiple benefits.<\/p>\n
Bridge loans are a strictly short-term financing option.<\/p>\n
Unlike mortgages or college tuition loans, bridge loans require you to pay back your debt over a short amount of time.<\/p>\n
During that shorter period of time, it\u2019s less likely that you\u2019ll suffer financial hardship that makes it impossible to repay your loan.<\/p>\n
The application and underwriting<\/a> process for bridge loans is generally faster than it is for traditional loans.<\/p>\n Additionally, it\u2019s relatively easy to qualify for a bridge loan, assuming you qualify for a mortgage to purchase a new house.<\/p>\n Bridge loans let you choose your repayment option. You can either repay your entire bridge loan before or after securing your permanent financing.<\/p>\n 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.<\/p>\n Assuming you make your payments on time, your credit rating will improve, and you\u2019ll qualify for long-term loans you\u2019d otherwise be ineligible for.<\/p>\n 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.<\/p>\n Bridge loans are non-recourse loans<\/a>, which means the lender can only seek repayment of the loan through the actual property.<\/p>\n As the borrower, you\u2019re not personally liable for repaying the outstanding loan balance. If you can\u2019t repay your loan, the lender will only be able to claim your property as collateral.<\/p>\n Despite their benefits, bridge loans present a few disadvantages.<\/p>\n Bridge loans require you to repay your loan over a shorter period of time than a mortgage or other long-term financing. Bridge loans also tend to come with higher interest rates than long-term financing solutions.<\/p>\n Because bridge loans are short-term loans, lenders are likely to be less flexible when it comes to payments. If you\u2019re behind on your payments, be prepared for higher late fees and steeper penalties.<\/p>\n Bridge loans rely on more permanent financing\u2014they\u2019re not a long-term financing solution.<\/p>\n However, long-term financing isn\u2019t always available. For instance, if the housing market collapses, you\u2019ll be left without funding, scrambling to repay your bridge loan.<\/p>\n Last but not least, bridge loans can be expensive.<\/p>\n 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.<\/p>\n More on this below.<\/p>\n 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\u2019t solid, you\u2019ll struggle to qualify for any type of bridge loan.<\/p>\n Yes!<\/p>\n Bridge loans aren\u2019t just for private homeowners.<\/p>\n Businesses can also use bridge loans to immediately purchase real estate or fund a short-term cost.<\/p>\n Just like regular bridge loans, business bridge loans typically come with higher interest rates, but they allow quick access to capital than traditional financing.<\/p>\n Some situations where your business might use a bridge loan include:<\/p>\n You can obtain a bridge loan through a variety of different lends: banks, credit unions, and other financial institutions. That said, it\u2019s most common to secure a bridge loan from your current mortgage provider.<\/p>\n If you\u2019re interested in a bridge loan, make sure you call your lender first.<\/p>\n 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\u2019t have a quality track record.<\/p>\n Bridge loans aren\u2019t cheap.<\/p>\n Although they\u2019re a great way to obtain temporary financing for your new property, remember that bridge loans usually cost more than a traditional mortgage.<\/p>\n Interest rates on bridge loans depend on i) your credit score and ii) the size of your loan.<\/p>\n Overall, interest rates on bridge loans range from the prime rate (3.25%) to 8.5% or even 10.5%.<\/p>\n Interest rates on business bridge loans range even higher, typically from 15% to 24%.<\/p>\n In addition to your interest rate, you\u2019ll need to pay legal and administrative fees, along with closing costs.<\/p>\n Closing costs and fees for bridge loans hover around 1.5-3% of the total loan amount. These costs often include the following:<\/p>\n Before you commit to a bridge loan, remember to consider all the associated costs!<\/p>\n If you can\u2019t access long-term financing, bridge loans can be a great tool for obtaining funds.<\/p>\n However, they have their downsides, and they\u2019re not the only tools out there.<\/p>\n Before you take out a bridge loan, consider other options including:<\/p>\n A home equity loan lets you borrow against your home equity.<\/p>\n Compared to a HELOC (see below), a home equity loan is a lump-sum payment. Interest rates on home equity loans typically start around 2% above the prime rate.<\/p>\n If you\u2019re a homeowner who knows exactly how much you need to cover the down payment on your new house, a home equity loan might be a great option!<\/p>\n A HELOC<\/a> lets you take out a credit line against the equity in your current home.<\/p>\n Whereas home equity loans come in the form of a lump sum payment, a HELOC gives you access to credit on a revolving basis. These credit lines typically have a repayment period of up to 20 years.<\/p>\n 20 years is a long time! That means you\u2019ll have longer to repay your debt. Contrast that with the short repayment period offered by bridge loans.<\/p>\n Interest rates for a HELOC are generally the prime rate plus 2%.<\/p>\n Today, that would be around 5.5%. That\u2019s way less than the 10.5% interest you might find yourself paying on a bridge loan.<\/p>\n All in all, a HELOC is a great alternative to a bridge loan.<\/p>\n You can draw on your line of credit as needed, you\u2019ll enjoy a lower interest rate, and a longer repayment period.<\/p>\n A business line of credit<\/a> is a type of revolving loan that gives your business access to capital to cover short-term costs.<\/p>\n Business lines of credit aren\u2019t issued in lump sums.<\/p>\n That means you\u2019ll only pay interest on the money you draw against the line.<\/p>\n Bridge loans, on the other hand, are issued in lump sums\u2014that means you\u2019ll pay interest on the entire loan amount, even if you don\u2019t use all of it.<\/p>\n Business lines of credit typically range from a few months to 10 years. Interest rates vary by lender, but many traditional banks offer business lines of credit with interest rates as low as 7%.<\/p>\n Business lines of credit can be a great alternative to bridge loans; however, it\u2019s often hard to secure a business line of credit from a brick-and-mortar bank. Online banks offer business lines of credit, but they charge higher interest rates (5% to 99%).<\/p>\n With that in mind, only use business lines of credit to cover short-term or sudden, unanticipated expenses.<\/p>\n Also known as \u201cpiggyback loans,\u201d an 80\/10\/10 lets you buy a home using two mortgages at once.<\/p>\n The first mortgage covers 80% of a home\u2019s purchase price.<\/p>\n The second loan \u201cpiggybacks\u201d on your first mortgage and covers another 10% of the purchase price.<\/p>\n The last 10% of the purchase price is your down payment.<\/p>\n Once your first home sells, you\u2019ll use those proceeds to pay off your second mortgage.<\/p>\n Short answer: it depends on your needs!<\/p>\n For the right homeowner, bridge loans can be a great idea. They offer a short repayment period, flexibility, speed, and are non-recourse loans. However, before committing to a bridge loan, it\u2019s important to explore your options.<\/p>\n\n
Flexible repayment options<\/h3>\n<\/li>\n<\/ul>\n
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Non-recourse<\/h3>\n<\/li>\n<\/ul>\n
Cons of Bridge Loans<\/h2>\n
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Large payments<\/h3>\n<\/li>\n<\/ul>\n
\nThat means you\u2019ll pay back your bridge loan over larger payment installments.<\/p>\n\n
Less flexibility from lenders<\/h3>\n<\/li>\n<\/ul>\n
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Relies on more permanent financing<\/h3>\n<\/li>\n<\/ul>\n
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Cost<\/h3>\n<\/li>\n<\/ul>\n
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Sound finances<\/h3>\n<\/li>\n<\/ul>\n
Bridge Loans for Businesses<\/h2>\n
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Bridge Loans Lenders<\/h2>\n
Bridge Loan Costs<\/h2>\n
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Bridge Loan Alternatives<\/h2>\n
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Home Equity Loan<\/h3>\n<\/li>\n<\/ul>\n
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Home Equity Line of Credit (HELOC)<\/h3>\n<\/li>\n<\/ul>\n
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Business Line of Credit<\/h3>\n<\/li>\n<\/ul>\n
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80-10-10 Loan<\/h3>\n<\/li>\n<\/ul>\n
Bridge Loans: A good option?<\/h2>\n
FAQs<\/h2>\n