Bridging loans

A bridging loan is a type of short-term loan, typically taken out for a period of fifteen days to three years pending the arrangement of larger or longer-term financing. It is also known as also known as a "caveat loan," and also known in some applications as a swing loan. It is interim financing for an individual or business until permanent or the next stage of financing can be obtained. Money from the new financing is generally used to pay back the bridge loan, as well as other capitalization needs.

Bridging loans are typically more expensive than traditional financing solutions to compensate for the additional risk of the loan. These loans typically have a higher interest rate, points and other costs that are amortized over a short period of time and various fees and other inducements such as equity participation by the lender in some loans. The lender also may require cross collateralization and a lower loan to value (LTV) ratio. On the other hand they are usually arranged quickly with relatively little documentation.

These loans are often used for commercial real estate purchases to quickly close on a property, retrieve real estate from foreclosure, or take advantage of a short-term opportunity in order to secure long term financing. Bridge loans on a property are usually paid back when the property is sold out refinanced with a conventional lender, the borrower's creditworthiness improves and the property is improved or completed. There is a specific improvement that allows a permanent or subsequent round of mortgage financing to occur. The timing issue may take place from project phases with different cash requirements and risk profiles as much as ability to secure funding.

The interest rates for such loans are usually 12-15%, with typical terms of up to 12 months may be charged. The LTV ratios generally do not exceed 65% for commercial properties and 80% for residential properties, based on appraised value. A bridging loan may be closed and it is available for a predetermined timeframe or open in that there is no fixed payoff date although there may be a required payoff after a certain time.