Long-term bridge loans provide short to medium-term financing, and can come in quite substantial amounts. That makes them well suited for many real estate-related situations. Here are a few times when you might use a long-term loan if you're buying, selling or rehabbing a property.
Buying a New Home
Many homeowners use the equity that they receive from the sale of their current home, in order to make a down payment on a new home.
Selling a house before buying one creates potential risk, though -- your new home purchase could fall through. In this situation, you wouldn't have a house to live in until you found and bought a different one. Renting is always an option, but it's less than ideal in many situations. You don't build up equity when renting, and you may not find a rental you like on short notice.
A bridge loan removes this risk by providing financing for your new home purchase. You can take out a bridge loan to purchase your new home with, and then sell your current home after you close on your new one. The proceeds from the sale can pay off the bridge loan. If the new home purchase falls through, you'll still have your current house to live in.
Most homeowners who use a bridge loan for this purpose choose a relatively short-term bridge loan. If houses in the local area are listed for several months before selling, however, a longer-term bridge loan is a better choice. You won't have to fret about the loan coming due before your current home sells.
Flipping a Single-Family House
Professional house flippers regularly use bridge loans to finance their projects. A loan provides funding while a house is being rehabbed and sold, and professionals don't have to commit to decades of payments.
When a bridge loan is used to finance house flipping, the duration of the loan should be based on the amount of work involved and the current real estate market.
If a house needs only minimal work and properties are selling quickly, a short-term loan is most advantageous.
If a house needs a complete remodel and/or homes are selling slowly, a long-term bridge loan provides more safety. Should unexpected work have to be done and delay the sale, professional flippers don't have to worry about paying off the loan immediately. The same is true if a property takes months to sell.