First, let’s define a bridge loan. Essentially, bridge loans are designed as interim financing for an individual or business until permanent financing can be found. Subsequent money used for permanent financing, is sometimes referred to as a “take out” loan because it pays back the bridge loan.
Bridge loans will be more expensive in all respects, from up front points, to origination costs and the interest rate. The term is usually less than a year, and the bridge loan lender will want to see that you have a plan to put the next stage, or permanent financing in place.
Rehab Loans - a Use for Bridge Loans
One of the more common uses of bridge loan financing is to quickly close on a real estate purchase. For example, an investor may see a commercial building he wishes to purchase that has been poorly managed and in moderate condition. A bank may not initially lend on this type of property, so the investor would get a bridge loan to buy, update and lease-up the property. Once the property has stabilized, the investor can turn to a bank or other funding source to take out the bridge loan and replace it with permanent financing.
The reason a bank would likely not fund the loan on the building is because it is more speculative in nature, the property may not be fully leased up, may not be in optimal condition, or may otherwise have some criteria that doesn’t quite match a bank’s more conservative lending profile. But because this added risk, an investor is likely to get a better price on the property which offsets the higher costs of the bridge loan financing.