Bridge loans are used by customers as an effective vehicle to capitalize on a purchase opportunity. It can be considered as a short term financing scheme which is generally expected to be paid back, within the range of 6-36 months, till the time the borrower gets more permanent and lower cost financing.

So, bridge loans, (or swing loans as they are otherwise said) is a short term loan provided by various banks like Bank of India, Citibank, ICICI etc. often used for commercial real estate purchases, retrieve real estate from foreclosure.

What is gap financing?

Bridge loans in corporate finance are called gap financing, and are used to cover the time between redemption of issuance of one bond and its replacement by a new issue. They can also be operating loans for periods between LOI and acquisition, or quiet period and IPO.

Bridge loan may contain a decent proportion of prepaid interest, sometimes as much as six months. If the home gets sold before that time, you may receive interest payments back, but if it hasn't sold, you may be required to continue payments.

Types of Bridge Loans

There are a couple of types of bridge loans.

• The consumer borrows the money to pay off his/her existing mortgage and enough to make his/her desired down payment on the new home. Usually the consumer is not required to make monthly payments on bridge loan but has to make only the monthly mortgage payment on the new home, and when the old home sells the accrued interest and the outstanding balance on the bridge loan is paid back.


• The consumer keeps his current mortgage, but borrows against the equity in the current home and uses that money as the down payment on the new home. Let us illustrate that with an example: Say your new home costs Rs 5000000. You've built up Rs. 1750000 in equity in your current home, which today is worth Rs. 3000000 and has an outstanding mortgage balance of Rs1250000. You want to make a down payment of Rs1000000 on your new home and you've earmarked Rs500000 in savings to cover part of the cost. A bridge loan would let you borrow against that Rs1750000 in equity to help make up the difference.

How Bridge Loans Works?

Bridge loan or swing loans pays off the old mortgage and goes toward the down payment on the new home. When the old home gets sold, you pay off the bridge loan and continue paying the traditional mortgage on the new home.

Before considering a bridge loan, it is advisable to check with your local realtor to see how long homes in your area and their corresponding price range are sitting on the market. While it's always nice to have the option of a bridge loan, it's always better to wrap up the sale of your existing house or property before you commit to purchase a new