A bridge loan is a short-term loan designed to cover the time it takes a borrower to secure permanent financing or remove an existing obligation. The bridge loan is an immediate source of cash that helps a borrower meet his or her payments.
- short-term (usually up to one year)
- carries a relatively high interest rate
- requires some form of collateral
A bridge loan might be taken if a homeowner buys a new house with a new mortgage but has not yet sold the old one and paid off its loan. The bridge loan covers the payments for one of the properties until the old house is sold. During this time, the borrower makes interest only payments on the bridge loan. Once the old house sells, the bridge loan is paid off with a lump sum. Another use for bridge financing is to pay off a construction loan upon the completion of a residence while the owner obtains a permanent mortgage.