What is a Bridge Loan?

Bridge loans are short-term financing sources that provide a “bridge” between one financing period and another. Commonly used to purchase or finance a new real estate purchase before previous properties are sold, bridge loans help buyers secure real estate financing when they may not be able to come up with the cash or monetary assets required to close the purchase quickly.

Bridge loans typically fund quickly (within 24-48 hours), don’t require private mortgage insurance, and come with high interest rates. They are intended to be used for a short period of time, often two weeks to three years. After that, borrowers typically refinance the loan with a traditional loan or another form of financing.

Advantages of Bridge Loans

Bridge loans are a great option for those who need access to cash fast in order to purchase a new property before the current one is sold. Some of the advantages of bridge loans include:

1. Quick Funding: Bridge loans can be approved and funded within days. This is beneficial for those who need to act fast in order to secure a property.

2. Lower Credit Requirements: Because bridge loans are generally used for a short period of time, lenders typically don’t require perfect credit scores or high income. This means those with below-average credit scores can often acquire bridge loans.

3.No PMI: Private mortgage insurance (PMI) is not required with bridge loans, as with traditional mortgage loans.

Disadvantages of Bridge Loans

Bridge loans are helpful when making a real estate purchase, but they come with several drawbacks.

1. High Interest Rates: Bridge loans are often more expensive to obtain than traditional loans, with rates typically ranging from 8-10%.

2. Short-Term Funding: Bridge loans are only available for a limited period of time, typically two weeks to three years depending on the lender. This means borrowers must obtain additional financing before the repayment period ends.

3. Unsecured Financing: Bridge loans are not secured by collateral. This means lenders can’t repossess your property if you fail to repay the loan.

Bridge loans are a great option for those who need to purchase a property before selling the current one. However, it’s important to understand the risks and costs associated with these loans before taking one out. Be sure to shop around for the best rates and repayment terms for your needs.