What is a Bridge Loan?

There are plenty of terms that exist in the investment world, and a “bridge loan” is one of them. So, what exactly is a bridge loan? A bridge loan is a type of loan that helps you purchase a new property. However, there is a lot more to it than that.

There are advantages and disadvantages to bridge loans, and we will guide you through them.

What is the definition of a bridge loan?

A bridge loan is a loan that can help you “bridge the gap” between when your existing property is sold and when a new property is being bought. It is a short-term financing option that you can choose until you manage to secure a new property. A bridge loan provides you with cash flow and allows you to use the equity of your existing property as the down payment for the new property.  

Usually, bridge loans are temporary solutions that can last for about six months. However, they can also be as short as three months or even be extended to longer than a year. Bridge loans are also typically selected as an option when bidding wars ensue within the market. This means that with a bridge loan, you can get your new property while not having to worry about selling your existing property beforehand. Once you sell the existing property, you can also use the financial gain to help pay off the bridge loan and the interest accrued with it. 

How is a bridge loan useful?

A bridge loan can be useful in various situations. For instance, a bridge loan can be advantageous if you’re interested in a new property while you still have to sell your existing one. A bridge loan is also important when it comes to giving yourself peace of mind. This is in addition to curbing any anxieties that you may have about securing a new property. The flexibility of a bridge loan provides you with some extra time to sell your existing property as well. 

A bridge loan also allows you to use the equity gained from your existing property to make the down payment required for a new property. In turn, a bridge loan can provide you with the finances needed to upgrade a new property before anyone lives in it. 

Is a bridge loan for everyone? 

Despite all of the advantages of a bridge loan, it still may not be for everyone. This is because there is nuance in everyone’s financial situation and goals when it comes to buying and selling properties. 

One of the main disadvantages of a bridge loan is that the interest accrued due to having it may be very high. This means that in total, the finances involved can be more expensive than other options. However, it is also important to note that a bridge loan that has a shorter term and can be useful in offsetting such a high cost. 

A bridge loan can also be a higher risk to you because of the higher rate involved in and of itself. Take note that there is no guarantee that your existing property will sell in time during the term of the bridge loan. 

Another disadvantage is that bridge loans in general can vary in terms of conditions and costs. Selecting the right bridge loan option can be a difficult process and take up a lot of valuable time. 

Is refinancing a bridge loan a good idea?

Knowing the basics of a bridge loan is a step in the right direction. However, you should also remember that a bridge loan functions like its namesake. Therefore, refinancing is an option to consider in order to make the transition from a bridge loan to a more long-term mortgage. By refinancing, you can get a new and more manageable loan. Having the right type of loan can, in turn, help you pay off your debts more effectively.

Share