A bridge loan is a short-term loan that a person takes out until he or she can secure more permanent financing. Bridge loans are a financial component of real estate transactions.
For some people, the process of buying and selling a home happens more quickly than expected, leaving them short of financial resources to fund the purchase of a new home while waiting for an old home to sell. It can take some time to secure a standard mortgage or loan to purchase a home, but bridge loans are designed to cover that gap of time. The additional benefit of bridge loans is they can provide the homeowner with a sufficient amount of cash to cover his or her other home ownership expenses in the interim, explain authors at Investopedia. Bridge loans are called such because they "bridge" the gap in time when people need cash to pay for home expenses but don't otherwise have access yet to that money.
Bridge loans are available for individuals and businesses. They come in six types: hospitality, retail, office, industrial, multi-family and personal property. Bridge loans can help people purchase a home at an auction, invest in a property, perform renovations, relocate and complete new construction on their current property.
Advantages of Bridge Loans As with any type of loan, bridge loans come with some positive and some negative components. While homeowners benefit from the immediate access to cash that bridge loans provide, they can be hit with higher interest rates that often accompany bridge loans, Investopedia says. Bridge loans are generally short, lasting up to a year at most, and they are attached to collateral such as a home or personal property. In addition to providing homeowners with cash for home purchases and home repairs, bridge loans eliminate home buying restrictions for those who wouldn't otherwise be able to buy a new home while waiting for the current one to sell.
Another benefit of bridge loans is approval is faster for this type of loan than it is for a more traditional home loan. Bridge loans also tend to have more lenient payment schedules, giving homeowners the option of repaying the loan either before or after a longer-term loan has been secured, according to Lending Tree. Homeowners are also usually attracted to bridge loans because they do not carry repayment penalties.
Potential Disadvantages of Bridge Loans Before jumping to secure a bridge loan, however, homeowners should consider the possible negative consequences of securing this type of loan. With the higher interest rates that are typically associated with them, bridge loans can be more expensive overall than traditional loans. People seeking a traditional loan and a bridge loan might also encounter qualification issues, as it is more difficult to get approved for two loans than for a single mortgage, says Lending Tree. Those who are approved for both types of loans also face the stress of paying off two home mortgages, which can increase the risk of accumulating debt if payments are not made in full. Lastly, the terms and conditions of the loans and repayment obligations can vary widely depending on the lender. For that reason, homeowners generally shop around for the loan with the best terms for their needs.