Are Bridge Loans Interest Only?

Bridge loans function as a temporary financial solution, providing immediate funding during a transitional period. These loans are distinct from traditional financing options due to their short duration and specific use cases. Understanding their typical payment structures is important for anyone considering this financial tool.

What a Bridge Loan Is

A bridge loan, sometimes known as swing or gap financing, bridges a financial gap between two transactions or events. This short-term financing provides immediate capital when a longer-term solution is not yet available. It is frequently used to facilitate transitions requiring quick access to funds.

Homeowners often use bridge loans to purchase a new property before their current home sells. This allows them to access equity in their existing home for a down payment or the full purchase price of the new property. Businesses also utilize bridge loans to manage interim expenses, such as payroll, while awaiting more substantial, long-term funding like equity financing rounds.

Common Payment Structures

While the central question revolves around whether bridge loans are exclusively interest-only, this structure is common but not the sole option. Many bridge loans feature an interest-only payment structure. Under this arrangement, borrowers make regular payments covering only the accrued interest, with the entire principal balance due at maturity. This approach helps keep monthly financial obligations lower during the loan term, which can be beneficial for managing cash flow.

Other payment structures are also available, though less frequently encountered. Some bridge loans allow for deferred payments, where both principal and all accrued interest are paid in a single lump sum at the end of the loan term. This option provides maximum flexibility, as it removes the burden of monthly payments entirely until the anticipated sale or refinancing occurs. Less common are structures that require traditional principal and interest payments throughout the loan’s duration, similar to a conventional mortgage. While this reduces the final balloon payment, it increases the borrower’s ongoing monthly financial commitment.

Key Characteristics of Bridge Loans

Bridge loans are characterized by several defining features that differentiate them from traditional lending products. These loans are inherently short-term, typically ranging from six to twelve months, though some may extend up to three years. This brief duration is designed to bridge a temporary financial need, not to serve as long-term financing.

Interest rates for bridge loans are generally higher than those for conventional loans, reflecting their short-term nature and the increased risk for lenders. Rates can vary, often ranging from 6% to 12%, or approximately 2 percentage points above the prime rate. These loans almost always require collateral, with real estate being the most common asset pledged. Lenders assess the property’s market value and equity to determine the loan amount, often requiring at least 15% to 20% equity in the collateral property.

A primary advantage of bridge loans is their speed of approval and funding. While traditional mortgages can take weeks to process, bridge loans can often be made available within days, sometimes even as quickly as 72 hours. This rapid access to capital supports time-sensitive opportunities. However, this expediency comes with associated costs, including closing costs that can range from 1% to 3% of the loan amount, covering appraisal and origination fees.