Nope, it’s not what you think. A bridge loan, sometimes referred to as “gap financing”, provides a borrower with temporary funds that will be paid back in a relatively short period of time. The source for payback would be a clearly defined event, the occurrence of which would generate the funds necessary to payback the loan.
An example of a bridge loan could be a $100,000 loan to an individual purchasing a business today with a payback coming from the next quarterly distribution of funds from a family trust. Another example could be a loan to an individual purchasing an investment with the payback being tied to the maturity date of a Certificate of Deposit (thereby avoiding any penalty for early withdrawal).
Perhaps the best example for our purposes would be a homeowner purchasing a new home prior to selling their existing home. Let’s attempt to illustrate this. Assume that the homeowner currently owns property “A” which is worth $400,000, and has a current loan balance of $150,000 resulting in equity of $250,000.
Let’s further assume that the new property being purchased, Property “B” has a value of $600,000 and the purchaser wants to transfer all of their equity in Property “A” to Property “B”.
In this example, the equity in Property “A” equals the Bridge loan for Property “B”.
Equity = Bridge Loan = $250,000
When the homeowner sells Property “A” the cash proceeds from the sale will be used to payoff the Bridge Loan on Property “B”. Now the equity in Property “B” is equal to the previous equity in Property “A” which remains $250,000.
Since many home purchasers need the funds/equity from their current residence in order to purchase a new residence, a bridge loan can fill that temporary gap. While this is a solution to the temporary problem, it may not be the best solution. Bridge loans, when available, tend to be more expensive than more conventional forms of financing. A more conventional way to fill this gap would be to have a Home Equity Line of Credit (HELOC) available to extract the equity from one property and transfer it to the new property. However, sometimes timing is such that it necessitates a Bridge Loan. Preferred Financial frequently can accommodate our client’s needs for this type of loan.