How Does a Bridge Loan Work?

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Andy Dean

Why Use a Bridge Loan?

The most common use of a bridge loan is when you are buying another property and don't have the money for the down payment until your primary property sells. This could be a home or an investment property. Businesses also use bridge loans to buy new office locations, warehouses and other commercial properties. One business partner can even use bridge loans to buy out the other partner, if necessary.

How Does a Bridge Loan Work?

To apply for a bridge loan, you must show that you are financially able to pay both mortgage payments in case the primary property does not sell right away. With most bridge loans, you don't need to make a payment for the first few months but the interest will accrue during that time. These are short term loans, normally coming due in a year or upon the sale of the primary property. The loan is secured by the primary property and used as a down payment for the new property. Because it is a short term loan, the interest rates are usually quite a bit higher than regular mortgages and there are fees associated with it.

Pros and Cons of a Bridge Loan

The good side of a bridge loan is that you can buy another house or business property without selling your current home or office first. In a good market where real estate is selling quickly, this is a good option to have. Especially if you find a property with an exceptional selling price, you won't have to miss out on the deal. The bad side of these loans occurs when there is a slow market. You will have to make two mortgage payments while interest is accruing on a third. Then if the primary property does not sell in the year, you will be making payments on the bridge loan too. You must make absolutely sure your financial situation can handle all the payments.