loans available, it’s normal to have questions. Financing the answers can help you select terms that fit your project well. This guide covers some frequently asked questions about bridge loans.

What Are Bridge Loans?

A bridge loan is a short-term financing option generally used in real estate. This loan option is also known as a hard money loan, asset-based loan or private money loan. The purpose of this loan is to have funds to close quickly on a commercial property.

What Are the Terms and Fees Like for Bridge Financing Options?

There are two main types of bridge financing, and the structure determines the costs. The first has a structure similar to a conventional mortgage, but with terms of only six months instead of 25 years. In this case, approval is based on the business’s credit rating, revenue, available capital and similar factors.

The second type of bridge financing uses the property for purchase as collateral. This is the essence of asset-based lending. Because the loan is based on the value of the real estate, the company’s credit rating is less important. It’s possible for real estate developers and house flippers to qualify even with average credit.

In either situation, ABL financing carries somewhat higher interest rates than long-term mortgages for property purchases. This is because of the increased risk the lender has to accept and the short-term nature of the loan.

How Are Bridge Loans Used?

One option with ABL financing is to use the loan capital to purchase an inexpensive property, remodel the real estate and sell it on the market. With the revenue from the sale, the remodeling business can make a profit, pay off the loan and potentially invest in the next project.

Another option is to apply for bridge financing and a traditional mortgage at the same time. Mortgages often take several months to get approved, which is just too slow for real estate acquisitions. By combining the speed of a bridge loan with the low interest rates of conventional mortgages, real estate businesses can save money and increase revenue.

To follow this method, look for bridge loans that allow for prepayment without a penalty. That way, it’s possible to use the funds from the long-term mortgage to pay off the bridge loan as soon as the financing goes through.