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A bridge loan is a short term loan used by a person (or company) who needs a quick cash infusion until permanent financing can be achieved. A bridge loan, sometimes called a loan or financing swing away, it is generally expected to be repaid quickly. Most bridge loans have a duration of about six months to a year.

When someone would need a bridge loan?

Bridge loans are often used by potential buyers who are ready to buy, but have not yet sold their current home. When the housing market is booming and houses are selling within days or weeks to be listed, a bridge loan makes little sense. But what about those times when the housing market seems to move along at a more reasonable pace?

Imagine, for example, you find your dream home. You are willing to buy it, except for one major setback: you need to sell your current home first. In the meantime, you can enter up to this dream home by requesting a bridge loan. A bridge loan can you afford the mortgage on your current home, or raise enough money for a down payment on your dream house while you wait to sell your present home. With hindsight, the opposite would be ideal: selling your home, then finding your dream home. But since life, and in particular personal finance issues are not always ideal, a bridge loan is a viable option for those who find themselves caught between the two.

The conditions for a bridge loan can vary considerably. Some types of bridge loans allow you to pay any mortgage on your current home. A fairly typical bridge loan might work as follows: The bridge loan is used to pay off the mortgage on your current home, and the rest of the money is used for a down payment on your new home. In this type of scenario, closing costs and six months of prepaid interest are normally subtracted from the loan amount. If the first house is not sold after a period of six months, the borrower is usually allowed to begin making interest-only payments on the bridge loan. When the first house is sold, the bridge loan can be paid in full, with interest payments deferred credit of the borrower.

Be warned that using bridge loans in this way to reach the disparity between the two separate operations, can be costly. Bridge loans often come with high fees, so make sure you understand the terms of your loan before signing. Also, be prepared to face the possibility of having to pay the equivalent of three mortgage payments (your current house, new house, and the loan itself) until your house is sold. Before even considering a bridge loan, talk to your realtor. Find out how long the houses in the price range of your houses “are selling. If the housing market is so slow that you expect your home to remain unsold for several months, a bridge loan may not be a good idea.

Bridge loans are also commonly used in real estate investment. Those interested in investing in real estate, but do not have access to conventional loans, can use a bridge loan to purchase. Individuals who use bridge loans may be unable to qualify for conventional loans because of credit problems. Thus, many bridge loans are often available to non-traditional lenders, who offer interest rates ranging from 14-20 percent. These lenders often also charge the “points” or fees on these loans. A point is one percent of the total loan amount. Because these lenders are not as concerned with credit ratings as traditional lenders, bridge loans are much more accessible, but also very expensive.

Bridge loans offer a quick and relatively easy way to receive an injection of money fast. But they are also struggling with higher costs than average and interest rates. The best advice on bridging loans is perhaps the simplest: do not use them unless you really need.