What is a Bridge Loan in Real Estate?

A Bridge loan is a short term loan that helps in bridging the gap between short term cash requirements and long term loans. This loan is issued by a hard money Bridge loan lender and generally has to be paid off within 12 months. The borrower has to pay a premium rate of interest on this type of short term loan. A Bridge loan is secured by the real estate property that is being purchased or the existing property of the borrower that serves as collateral.

 A Bridge is often used in real estate transactions to provide a cash flow during the transitional period such as moving to a new house from the existing one. Homeowners borrow this kind of short term loan that puts more cash in their pocket to finance a new residence or pay off an existing debt obligation. A Bridge loan typically has a higher rate of interest that ranges from 8 % to 10%, thus making it more expensive than traditional, long term financial loans. However, the underwriting and application process of a Bridge loan is generally faster as compared to conventional loans.

When to use a Bridge loan?

 A bridge loan is most commonly used when you have an eye on a new house that you want to purchase and selling your current house is taking time. A borrower can use a part of a bridge loan to pay off their current mortgage while the rest they can use as a down payment on a new home.

You may seek a bridge loan in case:

  • You have decided to purchase a new home and have listed your current property for sale
  • Want to buy a home but the seller does not accept an offer contingent on the sale of your current home
  • You can not afford the down payment on the new home without selling your current property
  • The time of purchasing your new home does not align with the time selling your current home

Bridge Loan Costs

You can easily obtain temporary financing through a bridge loan if you want to buy a real estate property but have not sold your current property yet. However, this type of short term financing is typically more expensive than any other long term traditional loan. Bridge loan interest rate depends upon the borrower’s creditworthiness and on the loan size. Interest rates on Bridge loans generally range from 8% to 10%.

In addition to paying interest on Bridge loans, borrowers have to pay closing costs and additional legal and administrative fees as well.

Closing costs and other fees for a bridge loan generally range from 1.5% to 3% of the total loan amount which may include:

  • Appraisal fee
  • Administration fee
  • Escrow fee
  • Title policy costs
  • Notary fee
  • Loan origination fee

Is a bridge loan right for you?

 To answer this question, we first need to look at its pros and cons and in what situation it can work for you.

Pros of Bridge loan –

  •  The borrower can get immediate access to fund
  • Provide flexibility in real estate transactions
  • Underwriting process, loan approval and fund transfer is generally faster than the conventional Bank

Cons of Bridge loan –

  •  Borrowers have to pay a premium interest
  • Not an option for everyone because lenders typically require borrowers to have at least 20% home equity
  • A bridge loan is secured by your other real estate asset that you put as collateral. You may lose your property in case of default

Homeowners can take out a bridge loan against their current residence in order to make a down payment on their new home. A Bridge loan can be a good option if you want to purchase a new property before selling your current home. A bridge loan requires a borrower to put his existing property as collateral to secure the debt. A bridge loan lender can fund you a maximum of 80% of the combined value of your current home and the home you want to purchase. It means that the borrower must have at least 20% equity in that property that they are going to purchase. Also, the borrower has to pay premium interest on bridge loans that only last for six months to a year. So this loan is the best option for those borrowers who expect to sell their existing home quickly.

Bridge loans can be the best financing option when you need a quick fund but do not have access to a long term financing solution. However, a bridge loan puts you at risk of losing your property which you have put as collateral as a bridge loan only lasts for up to one year with a higher interest rate.