Bridge Loans Explained: Uses, Costs and Exit Strategies

Overview

Bridge loans are short-term, purpose-driven loans used to “bridge” the gap between an immediate funding need and an anticipated source of longer-term capital or liquidity. They are most common in residential and investment real estate but are also used by businesses that need fast working capital while awaiting longer-term financing, receivables, or grants (see Consumer Financial Protection Bureau guidance on short-term mortgages and temporary financing).

In my practice working with homeowners and real estate investors, I’ve found bridge loans deliver value when timing matters—especially in hot housing markets—provided borrowers understand the costs and have a realistic exit plan.

How bridge loans work (the mechanics)

• Security: Most bridge loans are secured by real estate (the property you’re selling, the property you’re buying, or another owned asset). Business bridge loans may be secured by business assets.
• Term: Typical terms range from 6 months to 36 months. Lenders design terms to match the expected time needed to sell a property or secure permanent financing.
• Repayment structure: Many bridge loans require interest-only payments during the term, with a balloon payment of principal due at maturity. Others roll interest into the loan balance.
• Speed: Underwriting and funding are usually faster than a conventional mortgage because the loan is short-term and asset-backed; some lenders can close within days to a few weeks.
• Cost: Expect higher interest rates and fees than long-term mortgage or business loans because of the loan’s shorter term and heightened risk to the lender.

Common uses

• Buying a new home before the old home sells (avoid contingent offers).
• Enabling a real estate investor to close quickly on a purchase while arranging permanent financing.
• Short-term funding for businesses awaiting a grant, invoice payment, or longer-term loan.
• Financing renovations that will increase value before permanent refinancing.

Typical costs and fees

Costs vary by lender, loan size and borrower credit. Typical components include:

• Interest rate: often higher than conventional mortgages — commonly high single digits to mid-teens, depending on borrower credit, loan–to–value (LTV) and market conditions.
• Origination fee: commonly 0.5%–2% of the loan amount.
• Closing costs: similar to mortgage closing costs—appraisals, title, escrow—often $1,000–$5,000.
• Broker fees: may apply if a broker arranges the loan.
• Prepayment and balloon terms: check for any prepayment penalties and how the balloon payment is handled.

(These ranges are illustrative. Rates and fees fluctuate; compare offers and read lender disclosures carefully. For government resources on short-term mortgages and consumer protections, see the Consumer Financial Protection Bureau at cfpb.gov.)

Exit strategies — how to repay a bridge loan

A bridge loan should be taken only when you have a credible, specific plan to repay. Common exit strategies:

1. Sale of an existing asset

• Sell the property used as collateral (or another asset) and use proceeds to pay the loan. This is the most straightforward exit for homeowners.

1. Refinance to a long-term mortgage

• Convert the bridge loan into a traditional mortgage when refinancing is complete; timing and underwriting must be aligned so you can close the refinance before the bridge loan matures.

1. Home equity line of credit (HELOC) conversion

• Use a HELOC or home equity loan as a lower-cost, longer-term replacement if you have sufficient equity. See our guide on Home Equity Line of Credit (HELOC) for differences between HELOCs and other options.

1. Business funding or grants

• For businesses, use anticipated grant proceeds, receivable collections, or a small-business term loan to retire the bridge.

1. Seller or lender extensions

• Some lenders will extend terms or restructure, but extensions cost money and are not a reliable primary plan.

In my client work, successful bridge-loan borrowers identify a primary exit and a credible backup (e.g., a refinance pre-approval or contingency plan if the sale takes longer). Relying on a speculative quick sale without pricing or staging plans is a common source of trouble.

Eligibility and underwriting

Lenders evaluate:

• Collateral value and LTV: Many bridge loans require substantial equity in the property (low LTV) because the loan is risky for the lender.
• Credit score and income: Strong credit and documented ability to make interest payments improve terms.
• Exit plan credibility: Lenders assess how and when you’ll repay.
• Property condition: For properties used as collateral, lenders may require an appraisal and inspection.

For small businesses, lenders also look at cash flow projections, contracts, receivables and business assets (see SBA guidance on short-term business financing at sba.gov).

Risks and common mistakes

• Underestimating costs: Fees and interest add up quickly; an interest-only structure can leave a large principal due.
• Over-optimistic sale timeline: Markets shift—if your home doesn’t sell quickly, extension costs or defaults can occur.
• Losing leverage: If the market weakens, your collateral may fall below the loan’s required equity level.
• Misreading terms: Some bridge loans have balloon payments or require full repayment on sale; read the note and closing disclosures carefully.

Alternatives to a bridge loan

• Contingent offers or home-sale contingency clauses (less competitive in tight markets).
• HELOC or home equity loan (lower cost but may have variable rates). See our comparison page on Bridge Financing for Home Buyers: Risks, Costs, and Exit Strategies for when a HELOC or bridge loan may be a better fit.
• Personal loans or business lines of credit for smaller amounts.
• Seller financing or a carry-back mortgage in some transactions.

How to evaluate bridge loan offers (practical checklist)

• Confirm the exact interest rate and whether it’s fixed or variable.
• Ask about all fees: origination, broker, appraisal, title, and any extension costs.
• Verify repayment schedule: interest-only, amortizing, balloon payment.
• Compare APRs and effective cost over the expected hold period.
• Get a written exit plan from the lender that aligns with your sale or refinance timeline.
• Consider a backup plan (short-term savings, HELOC standby, or contingency sale price).

Real-world examples

1) Homebuyer example: A borrower wants to purchase a new home but hasn’t sold their current property. A bridge loan provides a down payment and interim payments while the old home is listed. The borrower secures a buyer within eight weeks and repays the bridge loan from the sale proceeds. Key success factors: realistic pricing, professional staging, and an agreed-upon timeline with the lender.

2) Small business example: A retail business needs $75,000 to buy inventory for a seasonal contract while waiting on an expected receivable. A bridge loan closes quickly, the contract executes, the receivable pays, and the loan is repaid within three months. Key success factors: contract evidence, clear cash flow timing, and lender transparency on fees.

Frequently asked questions

Q: How fast can I get a bridge loan?
A: Some lenders can close in days or weeks; speed depends on documentation, appraisals and title work. (CFPB notes that short-term mortgage products often close faster but still require full disclosures.)

Q: Are bridge loans tax-deductible?
A: Interest on loans secured by your home may be tax-deductible if the funds are used to buy, build or substantially improve the home that secures the loan. Tax rules are complex—consult a tax professional or IRS guidance for your situation.

Q: Can a bridge loan convert to a traditional mortgage?
A: Yes—many borrowers plan to refinance the bridge into a conventional mortgage. Make sure you have a refinance pre-approval to reduce timing risk.

How I use bridge loans in client planning (professional insight)

I recommend bridge loans only when the borrower has:

• A documented primary exit (contract to sell, refinance pre-approval or awarded grant), and
• Enough cash flow to cover interest payments during the bridge term, plus reserves for a delay.

When negotiated well, a bridge loan can preserve a deal in a competitive market. When used without a plan, it can become an expensive short-term debt trap.

Sources and further reading

• Consumer Financial Protection Bureau — consumer guides on mortgage basics and short-term financing (cfpb.gov).
• U.S. Small Business Administration — guidance on short-term business financing options (sba.gov).
• HUD and major mortgage guides for consumer protections when using home-secured loans.

Disclaimer

This article is educational and does not constitute personalized financial, tax or legal advice. Rules, rates and programs change—consult a licensed mortgage professional, financial planner or tax advisor before taking a bridge loan.