A bridge loan is a short-term loan intended to close the gap between other transactions.
It has a couple applications in real estate, according to The Complete Real Estate Encyclopedia. First, it provides temporary financing at the end of a construction loan period. This allows time to arrange permanent financing. Second, at the retail level, a home buyer can use a bridge loan, secured by the equity in their current home, to provide a down payment on a new home. This second case is often used by relocated workers facing a time period during which they have to move into a new city but haven’t had the opportunity to find a buyer for their old home.
Incidentally, some sources refer to this kind of financing as a “swing loan” or a “caveat loan”. However, there is no difference between the three.
Bridge loan terms
The “bridge” in bridge loan refers to the interim nature of the note. That is, it bridges the time gap between the end of one loan and the beginning of another. Such a financial instrument could serve as a conduit between the old mortgage and a construction loan, or between a construction loan and the new mortgage.
Bridge loans are, by definition, short-term. That could be anywhere from a couple weeks to three years. TheTruthAboutMortgage.com, though, reports that six to 12 months is usual.
The most distinguishing feature of a bridge loan, though, is its high interest rate. Typically a bridge loan might be 200 basis points more expensive than a standard, fixed-rate loan, plus closing costs.
← Back to Glossary