When it comes to short-term real estate financing, bridge loans and hard money loans are two popular options. While both serve as temporary funding solutions, they differ in terms of purpose, requirements, and suitability. Understanding these differences will help you decide which option best fits your needs.
What Is a Bridge Loan?
A bridge loan is a short-term loan designed to “bridge” the gap between buying a new property and selling an existing one.
Key Features:
- Term: Typically 6 months to 3 years.
- Use Case: Commonly used by homeowners or businesses needing funds for a down payment before selling their current property.
- Collateral: Secured by the equity in the borrower’s existing property.
- Interest Rates: Lower than hard money loans but higher than traditional mortgages.
- Repayment: Paid off after selling the original property or securing long-term financing.
Pros:
- Provides quick access to funds for immediate needs.
- Helps avoid missing out on time-sensitive opportunities.
- Allows flexibility while transitioning between properties.
Cons:
- Requires a solid credit history.
- Approval depends on the equity in your current property.
- Can be risky if the property doesn’t sell as expected.
Best For:
- Homeowners or investors who need short-term funding to close a deal while awaiting proceeds from a sale.
What Is a Hard Money Loan?
A hard money loan is a short-term loan primarily used by real estate investors. It’s asset-based, meaning it’s secured by the value of the property being purchased.
Key Features:
- Term: 1 to 3 years.
- Use Case: Often used for property flips, renovations, or investments.
- Collateral: Secured by the value of the property being financed.
- Interest Rates: Higher than bridge loans, often ranging from 8%–15%.
- Repayment: Lump sum payment or interest-only payments with a balloon payment at the end of the term.
Pros:
- Quick approval and funding process.
- Credit score is less critical; focus is on property value.
- Flexible terms tailored to the investor’s needs.
Cons:
- High-interest rates and fees.
- Short repayment terms require clear exit strategies.
- Typically not suitable for owner-occupied properties.
Best For:
- Real estate investors looking for fast, flexible financing for flips or short-term projects.
| Aspect | Bridge Loans | Hard Money Loans |
| Purpose | Transitional financing for property buyers | Financing for real estate investments |
| Collateral | Existing property | Property being purchased |
| Approval Criteria | Based on credit and equity | Based on property value |
| Interest Rates | Moderate | High |
| Term Length | 6 months to 3 years | 1 to 3 years |
| Typical Borrowers | Homebuyers, businesses | Real estate investors |
How to Choose Between Them
Ask yourself the following questions to determine which loan suits your needs:
- What’s the purpose of the loan?
- If you’re buying a new home while waiting to sell an existing one, a bridge loan makes more sense.
- If you’re an investor aiming to renovate or flip a property, a hard money loan is likely the better choice.
- How quickly do you need the funds?
- Both options offer fast approvals, but hard money loans are often quicker because they prioritize property value over creditworthiness.
- What’s your financial situation?
- Bridge loans require good credit and equity in your existing property.
- Hard money loans are more lenient but come with higher costs.
- What’s your exit strategy?
- For bridge loans, you’ll pay it off when your current property sells or refinance into a traditional loan.
- With hard money loans, you need to sell the investment property or secure alternative financing.