Bridge Loans Explained: 2025 Costs and How They Work for Homebuyers and Businesses

Julia Kagan is a seasoned financial journalist and former senior editor for personal finance at Investopedia.

What Is a Bridge Loan in 2024?

A bridge loan is a temporary financing solution designed to cover immediate cash flow needs until permanent funding is secured or existing debts are cleared. Typically short-term and secured by collateral like real estate or business assets, bridge loans have higher interest rates compared to traditional loans but provide essential liquidity during transitional periods.

Commonly referred to as bridge financing or bridging loans, they are especially popular in the real estate market.

Key Highlights

• Bridge loans offer short-term financial support until permanent financing is arranged or debts are settled.
• While widely used in real estate, many businesses also rely on bridge loans to manage cash flow.
• Homeowners often leverage bridge loans to buy new properties before selling their existing homes.

How Do Bridge Loans Work?

Also known as interim or gap financing, bridge loans fill the funding gap when immediate capital is needed but permanent financing is pending. Both individuals and businesses utilize these loans, which lenders tailor to specific financial situations.

For homeowners, bridge loans enable the purchase of a new home by using the equity in their current property as a down payment while awaiting its sale. This approach provides additional time and financial flexibility, albeit at higher interest rates than alternatives like home equity lines of credit (HELOCs).

Lenders generally approve bridge loans for borrowers with strong credit scores and low debt-to-income ratios. Real estate bridge loans often combine mortgages on two properties, allowing buyers to manage payments until the previous home sells. Typically, lenders finance up to 80% of the combined property values, requiring substantial equity or cash reserves.

Businesses turn to bridge loans to maintain operations while awaiting long-term financing. For example, a company expecting equity funding in six months might use a bridge loan to cover payroll, rent, utilities, and inventory expenses in the interim.

Important Consideration

In real estate scenarios, borrowers may need to handle payments on both the bridge loan and their existing mortgage until the original property sells.

Real-World Example of a Bridge Loan

In 2016, Olayan America Corp. used a bridge loan from ING Capital to quickly purchase New York City's Sony Building. This short-term loan facilitated the acquisition until permanent financing was secured.

Bridge Loans vs. Traditional Loans

Bridge loans offer faster approval and funding compared to traditional loans but come with shorter terms, higher interest rates, and larger origination fees. Borrowers accept these terms for the convenience and speed, planning to repay quickly with lower-cost, long-term financing. Most bridge loans also avoid repayment penalties.

Advantages of Bridge Loans

Bridge loans provide immediate cash flow, allowing homeowners to buy new homes before selling their current ones and businesses to cover urgent expenses.

Disadvantages of Bridge Loans

These loans generally have higher interest rates than traditional loans. Additionally, homeowners waiting to sell must manage payments on both the bridge loan and existing mortgage.

Qualification Criteria for Bridge Loans

For real estate bridge loans, an excellent credit rating and low debt-to-income ratio are essential. Lenders prioritize financially stable borrowers.

Conclusion

Bridge loans serve as vital short-term financing tools for homeowners and businesses awaiting permanent funding or managing obligations. While they offer quick access to cash and flexibility, borrowers should weigh the higher costs and dual payment responsibilities. Understanding these factors can help you decide if a bridge loan suits your 2024 financial strategy.

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