A bridge loan is a short term loan. The loan is usually taken out by a borrower against their current property to finance the purchase of a new property. Bridge loans are also called swing loans, gap financing, or interim financing. The bridge loan is typically good for six months to 1 year but can extend up to 18 - 24 months. A bridge loan essentially “bridges the gap” between the time the old property is sold and the new property is purchased.
How Do Bridge Loans Work?
A bridge loan can be used to pay off the loan(s) on your existing property
Buy a new property without selling your current one
It can act as a second/third mortgage behind your existing loan
To finance a project
A bridge loan can be structured, so it ultimately pays off the existing liens on the current property, or as a second loan on top of the existing liens. In the first case, the bridge loan pays off all existing liens, and uses the excess as a down payment for the new property.
If you choose the first option, you likely won’t make monthly payments on your bridge loan, but instead you’ll make mortgage payments on the new property. Bridge loans most always are interest only loans. And once the older property sells, you’ll use the proceeds to pay off the bridge loan, including the associated interest and remaining balance.
If you choose the second option, you’ll still need to make payments on your old mortgage(s) and the new mortgage attached to your new property, which can stretch even the most well-off homeowner’s budget. So make sure you’re able to take on such payments for up to a year if necessary.