How Do Bridge Loans Work?
A bridge loan is a short-term loan designed to provide immediate financing for individuals or businesses until a more permanent funding source can be obtained. It "bridges" the financial gap between two transactions, often in real estate.
Bridge loans work by using the borrower's existing property as collateral. The loan amount is typically based on a percentage of the property's appraised value or the purchase price. This type of loan is considered high-risk for lenders because it relies on successfully selling or financing the borrower's current property.
The key feature of a bridge loan is its short-term nature. The repayment period is usually a few weeks to a few months, and the interest rates tend to be higher than traditional loans. The borrower may be required to make monthly interest payments or choose an interest-only option with a balloon payment due at the end of the loan term. Homebuyers commonly use bridge loans to purchase a new property before selling their existing one.
It allows them to secure the new property without needing a contingency clause in the purchase agreement. Real estate investors also utilize bridge loans to acquire properties quickly or finance renovations.
