Real Estate Bridge Loan

What is a real estate bridge loan?

A real estate bridge loan (or swing loan) is a type of financing that’s popular with both investors and homeowners. It “bridges” the gap between the time an investor’s initial funds run out and the point at which another funding source becomes available. It can be beneficial when purchasing a new investment property before a previous investment sells or before you can secure a long-term home loan. Think of a real estate bridge loan as a short-term mortgage that provides immediate access to cash.

Bridge loans typically last between six months and one year, providing funds during a transition period such as waiting for an old home to sell and buying a new one. Like other home loans, you need to secure a bridge loan with an asset such as property—the asset could be at risk if you don’t make repayments on a bridge loan.

Many lenders offer real estate bridge loans. These loans come with interest, of course, that will increase the amount of money you need to pay back. Since a real estate bridge loan is a type of short-term financing, it typically carries higher interest rates than other loans—usually between 8.5-10.5%, depending on the asset type and the current interest rates. That’s because it’s intended to be an immediate cash flow fix rather than a long-term source of financing.

Typically, you borrow up to 80% of the value of the home you want to sell. Lenders might apply these funds to the down payment on your new home so the bridge loan doesn’t interfere with your existing mortgage. You can then pay off your current mortgage when you sell your home. Some lenders combine both mortgages—the one on your existing home and the one on your new home—and let you take out a new loan for up to 80% of your existing property’s value.

Real estate bridge loan case study

Let’s say a homeowner wants to buy a new home but won’t have sufficient funds for a down payment until they sell their existing property. So they apply for a real estate bridge loan, which provides funds for the down payment on the next property while they wait for their other property to sell.

The homeowner is approved for a bridge loan at 9% interest. They use the funds to secure the new property and to pay off the loan (and the interest) upon the sale of their current property. That means the homeowner doesn’t have to move into rented accommodation—or stay with friends or family—during the period between selling the old home and securing the new property.

The bottom line

A real estate bridge loan is a type of financing that provides immediate cash to fund a new property investment or home. Usually, an investor or homeowner will take out a bridge loan if they need funds for a new real estate asset while waiting for an existing property to sell.

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