What Is a Bridge Loan?
A bridge loan is a short-term, loan that helps “bridge the gap” until a longer-term funding method can be secured by the borrowing party.
A bridge loan– sometimes referred to as a swing loan, bridging loan, bridge financing, or gap financing– has several unique applications, especially in terms of real estate where a bridge loan can allow you to purchase a new property before selling your current one.
A bridge loan has several unique applications, especially in terms of real estate where a bridge loan can allow you to purchase a new property before selling your current one.
For that reason, bridge loans are often secured using an existing property.
Table of contents
- How do bridge loans work?
- Bridge loan examples: What can you use a bridge loan for?
- Pros and cons of bridge loans
- Is a bridge loan for you?
- Frequently asked questions
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How Do Bridge Loans Work?
Bridge loans work differently depending on the reason why they’re being used.
However, in terms of real estate– where they’re commonly used to purchase a new home before selling your old property– they work like this:
- You, the borrower decide you want to purchase a new property before selling your current home
- You apply and are approved for a bridge loan
- You then use the equity in your home as collateral for the down payment on the new home loan
- Finally, you begin paying back the bridge loan
Keep in mind that it’s possible you’ll need to begin paying back the bridge loan before the old property has sold.
That can put added pressure on you as you’ve just taken up a new mortgage (depending on whether that new mortgage is more or less expensive than the old one).
Bridge loan vs. Traditional loan
Often, approval for a bridge loan works a bit differently than a traditional loan.
How are they different? Here are the main ways a bridge loan tends to be different from a traditional bank loan:
- They often have faster approval time and funding speed
- They also typically have higher interest rates
- Terms tend to be shorter than traditional loans, from a few months to one year in most cases
- Approval factors tend to be different than traditional loans as well, with lower FICO requirements and debt-to-income ratio guidelines.
Bridge Loan Examples: What Can You Use a Bridge Loan For?
As we talked about earlier, bridge loans are common in real estate as they serve as an effective way to close what can be an awkward gap between waiting for a property to sell and buying the next.
With a real estate bridge loan, the property owner can move forward with purchasing that new loan without having to wait for the old property to sell, giving them added flexibility especially if they think the property may take a while to sell.
The two mortgages are then combined with the loan itself covering 80% of the combined value of both properties.
However, this isn’t the only way that bridge loans are used.
Bridge loans are used commonly by both large businesses and individuals to bridge the gap between the time it takes for them to obtain funding when purchasing things such as:
- A new facility for a product-based business
- A larger office
- An investment property for the purpose of real estate investing
- Or even the materials needed for a large construction job
Pros and Cons of Bridge Loans
While bridge loans have several unique qualities, there are also disadvantages that make them great for some in certain situations and not in others.
Here are the pros and cons of bridge loans:
Pros of Bridge Loans:
Pro: Flexibility to bridge the gap between important purchases
The primary benefit of bridge loans, the flexibility you gain by being able to bridge the gap between a sale or more secure funding for a large property or equipment purchase isn’t a small thing at all.
The ability to buy a new home before you sell your home you’re currently living in is a big benefit that many find worth the higher interest rates.
Pro: Might skip payments
Depending on various circumstances, by using a bridge loan to purchase a new property before your old one sells, you can often skip several mortgage payments in the process.
While this might sound like a small plus, considering that could be all or most of the time you need to get the sale, that can often be the perfect reprieve to manage the challenge of handling both mortgages while waiting for that old property to sell.
Cons of Bridge Loans:
Con: High interest rates
Bridge loans typically have higher interest rates than home equity loans, typically about 2% higher than the average 30-year fixed-rate mortgage, making them more expensive in the short term.
Con: Handling two mortgages at once can be stressful
While a bridge loan rolls both mortgages up into one, you’re still handling the two simultaneously, which can create added stress while you’re looking for a buyer for the old property.
Is a bridge loan for you?
Whether a bridge loan is the funding tool you need depends on what you need funding for and your timeline.
If you’re looking to make a new real estate purchase and you’re on a short timeline, or it will take time to sell, a bridge loan might be a good option.
If you need to make a large equipment purchase now but securing the funding will take time, a bridge loan could be exactly what you need to get that critical piece of large-scale equipment in place now so that you don’t skip a beat.
However, it’s also important to know that many other funding options are available to you, so take the time to consider your options and make the choice that best fits your needs.
Apply for a Bridge Loan with Excel Capital
If you’re in need of capital fast and can’t qualify for traditional financing due to strict credit requirements or you simply need funding faster than a traditional institution can provide, apply with Excel Capital.
Depending on which funding option you choose, you could be approved and funded in as little as 24-48 hours.
Get started and see what you can be approved for:
Get the capital your business needs fast. Apply for a bridge loan with Excel Capital:
Frequently Asked Questions
In most cases, bridge loan interest rates range from 8-10%, with closing costs from 1.5-3% depending on your creditworthiness, debt-to-income ratio, and other qualifying factors.
A bridge loan is useful if you’re in need of making a fast purchase for something like real estate, especially when the market is up and your window to take action is small.
