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What Bridge Loans Are and How They Work

A bridge loan is a short-term loan that helps people or businesses bridge a financial gap between two events. The most common use is in real estate: when someone wants to buy a new home before selling their current one, a bridge loan provides the funds needed to make an offer and close on the new property. The borrower then repays the bridge loan once their original home sells.

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Bridge loans typically last between 6 months and 3 years, though some may be shorter or longer depending on the situation. Unlike traditional mortgages that can take 15 to 30 years to repay, bridge loans are meant to be temporary solutions. The loan amount is usually based on the equity in the current home or the value of the property being purchased.

The structure of a bridge loan is different from other types of loans. Interest rates on bridge loans tend to be higher than traditional mortgages because they are riskier for lenders. A typical bridge loan might carry an interest rate between 2% and 5% above the prime lending rate, though this varies based on market conditions, credit history, and the lender. Some bridge loans are interest-only during the loan period, meaning the borrower pays only interest until the loan matures, at which point the principal must be paid back in full.

People also use bridge loans in other situations beyond real estate. A small business owner might take a bridge loan to cover payroll while waiting for a large contract payment. Someone might use a bridge loan to fund a home renovation before selling the property. A real estate investor might use one to purchase a property at auction quickly, knowing they can refinance later.

Understanding how bridge loans work is important before considering one. The loan covers a specific need for a defined time period, after which another funding source—like a home sale or business income—pays it back. This is fundamentally different from long-term loans where you plan to repay gradually over many years.

Practical Takeaway: A bridge loan serves as temporary funding between two financial events. Understanding whether your situation involves a clear endpoint—like a home sale or a known income event—helps determine if a bridge loan structure makes sense for your circumstances.

Costs and Fees Associated with Bridge Loans

Bridge loans come with several costs beyond the interest rate itself. Knowing these fees helps you understand the true expense of borrowing. Lenders typically charge an origination fee, which is a percentage of the loan amount charged upfront for processing the loan. This fee generally ranges from 1% to 5% of the total loan amount. On a $300,000 bridge loan with a 2% origination fee, you would pay $6,000 just to set up the loan.

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Interest costs are usually the largest expense. Because bridge loans are short-term, you might pay less total interest than on a long-term mortgage, but the interest rate itself is higher. For example, if you borrow $300,000 at 5% annual interest for one year, you would pay approximately $15,000 in interest. If the loan runs for six months, you would pay roughly $7,500. Some bridge loans allow you to defer interest payments until the loan matures, which can help with cash flow but means more interest accumulates over time.

Additional costs may include appraisal fees, title search and insurance, attorney fees, and inspection fees. Appraisals typically cost between $300 and $600. Title insurance and searches might run $500 to $1,500 depending on the property value and location. If an attorney is involved in the process, legal fees could range from $500 to $2,000. These costs add up quickly and should be factored into your financial planning.

Some lenders charge a "prepayment penalty" if you repay the bridge loan early. This is an extra fee designed to compensate the lender for lost interest. Prepayment penalties can range from 1% to 5% of the remaining loan balance. Other lenders offer bridge loans with no prepayment penalty, which is advantageous if you think you might pay off the loan early.

Extension fees may apply if you cannot repay the bridge loan by the maturity date and need more time. These fees can be substantial and might include additional interest charges plus a flat extension fee. Some lenders are more flexible with extensions than others, so this is worth discussing upfront.

Practical Takeaway: Calculate the total cost of a bridge loan by adding the origination fee, estimated interest for the full loan period, and all other associated fees. Comparing this total cost across multiple lenders reveals which option costs less overall, not just which has the lowest interest rate.

Comparing Bridge Loans to Other Financing Options

Understanding how bridge loans compare to alternatives helps you make an informed decision about which financing method suits your situation. Home equity lines of credit (HELOCs) are one alternative. A HELOC allows you to borrow against the equity in your current home. HELOCs typically have lower interest rates than bridge loans—often 1% to 3% above prime—and you only pay interest on the amount you actually use. However, HELOCs usually take several weeks to set up, whereas bridge loans can sometimes close within days. If you need money quickly, a HELOC may not be fast enough.

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Home equity loans are another option. These are lump-sum loans secured by your home equity. Interest rates on home equity loans are typically lower than bridge loans, and they offer predictable monthly payments. The drawback is that you receive all the money upfront and must pay it back over a set schedule, even if you sell your home early. Bridge loans, by contrast, are designed to be paid back in full when a specific event occurs.

A traditional second mortgage is similar to a home equity loan but through a different lender than your primary mortgage. The terms and rates are comparable to home equity loans, with the same advantages and disadvantages.

Personal lines of credit or personal loans are unsecured options that don't require collateral. These are faster to obtain than home equity products and don't put your home at risk. However, interest rates on unsecured personal loans are typically much higher than bridge loans—often 8% to 30% or more, depending on your credit. Personal loans also have lower maximum amounts available, often capped at $50,000 to $100,000.

Contingent offers on your home are another approach. Some real estate agents can help you make an offer on a new home contingent on selling your current home. This removes the need for a bridge loan entirely but may make your offer less competitive in competitive markets. Sellers often prefer offers that are not contingent on a home sale.

Seller financing is an arrangement where the seller of the property acts as the lender, allowing you to purchase without traditional financing. This is uncommon but possible in some situations. Terms vary widely based on negotiation with the seller.

Practical Takeaway: List your specific needs—how much money you need, how quickly you need it, how long you'll need it, and what collateral you're willing to use—then compare which financing option best matches those needs and offers the lowest overall cost.

When Bridge Loans May Be Useful

Bridge loans work best in specific situations where you need short-term funding and have a clear way to repay. The classic scenario is a real estate buyer who has found their ideal home but hasn't yet sold their current home. They may have only days or weeks to make an offer before someone else buys the property. A bridge loan lets them submit a strong offer with proof of funds, even though they're still waiting for their home to sell. The funds from the home sale then immediately repay the bridge loan.

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This situation is particularly common in competitive real estate markets. According to data from the National Association of Realtors, in competitive markets where homes sell quickly, buyers without a sale of their current home often lose out to buyers with cash or those already sold. A bridge loan can provide the funds to compete effectively. When the original home sells—often within 6 months to a year—the proceeds automatically pay off the bridge loan.

Real estate investors frequently use bridge loans. An investor might need to close quickly on a property being auctioned or sold under distressed conditions. Bridge loans can fund the purchase, and then the investor has time to secure longer-term financing or sell the property. Since investment properties may take longer to refinance or require renovation before resale, the 6-month to 3-year timeframe of a bridge loan works well