What Are Bridge Loans?

There is an impressively large diversity of loans offered by financial institutions, so many so that you may be unfamiliar with several different options that might be just what you're looking for. One of these is the bridge loan, so named because it bridges the gap until a more sizable loan is taken out. This loan is a type of short-term loan used to tide over a business or real estate purchase until a larger, longer-term loan can be secured.

For example, if you are a business owner looking for a loan which will allow you to remain in operation for a few weeks until you can finalize the terms on a several-year loan, you can take out a bridge loan. Typically, the loan is paid off using money from the larger, subsequent loan.

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Bridge Loans in Real Estate

One of the most common uses of the bridge loan is in real estate, in which the loan is used to quickly close escrow on a property or prevent foreclosure. The loan is then paid off at a later date, usually when the property is sold or refinanced with a more standard loan. The bridge loan affords the borrower a degree of flexibility due to its short term and allows for quick action.

Obtaining Bridge Loans

Bridge loans usually have higher interest rates of around 12% to 15%, due to the short duration of the loan. The loan usually has a term of a few weeks up to a year, and may or may not be a closed loan. Because bridge loans issued for real estate purposes are highly speculative in nature, more traditional lending institutions tend to eschew them, and would probably get in trouble with both other investors and governmental regulators if it made a practice of extending these loans.

Most such loans come instead from private citizens acting as investors, or other businesses that act as high-interest lenders. Some people who are looking to put down money on a house will take out a bridge loan to pay the money on the new house while their old house is being sold. They will then pay off the bridge loan with the money made from the sale of the old home. Naturally, this can be a bit risky as it presumes the sale of the house will outweigh the expense of the bridge loan. Consumers considering a bridge loan for this purpose may want to speak to an investment or mortgage specialist about their decision.

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