What is a Bridge Loan?
When to use a bridge loan
You've probably head people talk about a bridge loan, but do you really know what it is and how you can use it? Luckily these loans are pretty straightforward and can really be helpful in certain situations.
What is a bridge loan?
A bridge loan is a short-term loan that is used to "bridge" you, or finance your investment asset, between the current point in time until you can refinance your investment. A bridge loan is sometimes called a bridging loan (in the UK), a caveat loan, or a swing loan. They have several characteristics that make them unique.
First of all, they have short durations. A typical bridge loan is between a few weeks and a few years, but not nearly as long as a traditional mortgage. Also, because bridge loans are higher risk, they have higher interest rates than traditional loans. Also, this type of loan typically requires a lower loan to value ratio. And finally, these loans are somewhat flexible. Because they don't require the same approvals as a mortgage, they can often be approved and closed in a matter of days or weeks instead of months.
Why use a bridge loan?
Bridge loans are typically used to finance a small amount of time, when a specific goal can be met and the project can be refinanced under traditional terms. For example, if you are buying a home that doesn't meet strict guidelines you might not be approved for a traditional mortgage. One example is if there is a small repair that needs to be made but that you can't make until after you own the property. By getting a bridge loan you can buy the house, fix the defect, and then refinance into a traditional, lower cost mortage.
Bridge loans are also used in many commercial real estate transactions where the investor needs to move fast to acquire the property. Other uses include buying homes from foreclosure, as interim financing during construction, and to take advantage of time-sensitive opportunities.