An interim loan is a short-term financing arrangement, typically lasting 6 to 36 months, that gives a borrower temporary funds until permanent financing closes or a planned sale goes through. It is also called a bridge loan or swing loan, and it shows up most often in real estate, where the timing of a purchase rarely lines up neatly with the sale of what the buyer already owns. Payments during the term are usually interest-only, and the full principal comes due as a single balloon payment at maturity.
How the Structure Works
The design is built around speed and a short holding period. Money reaches the borrower in a lump sum at closing. Monthly payments cover interest only, so no principal is paid down during the term. On the maturity date, the entire outstanding balance is owed at once. That balloon is the defining feature of interim financing and the source of most of its risk: if the exit stalls, there is no built-in runway.
Lenders underwrite these loans differently from a 30-year mortgage. The loan-to-value ratio generally caps around 80 percent, so the borrower needs at least 20 percent equity or a 20 percent down payment. Approval leans less on debt-to-income math and more on the exit strategy. The lender wants to see a credible, dated plan for how the loan will be repaid: a sale under contract, a refinance in the pipeline, or construction milestones that will trigger permanent financing.
Common Uses
The classic residential case is a homeowner who wants to buy the next house before the current one sells. An interim loan funds the down payment or the full purchase price on the new property, secured by equity in the existing home. When the old house closes, the proceeds pay off the bridge. This removes the need to time two closings on the same day or write a purchase offer contingent on a sale.
In commercial real estate, the uses are broader. An investor may use a bridge to close quickly on a competitive deal and then refinance into a conventional commercial mortgage. Developers use them to span the window between finishing construction and locking in long-term financing based on the stabilized property’s income. Businesses also lean on interim loans during acquisitions when the deal clock does not match the permanent lender’s clock.
Interim loans are not construction loans. A construction loan disburses in stages tied to project milestones and runs until the build is complete. An interim loan hands over the full amount upfront. If you need money to build, a construction loan is the right instrument. If you need money to hold a position while arranging longer-term financing, that is interim loan territory.
What It Costs
Interim financing is expensive compared with conventional lending, and the premium shows up in several places.
- Interest rates. As of 2026, bridge loan rates generally run between 10 and 12 percent, depending on property location, leverage, and structure. Conventional mortgages typically sit in the 6 to 7 percent range. The spread reflects the lender’s higher risk on a short-term, lightly underwritten loan.
- Origination fees. Lenders charge roughly 1.5 to 3 percent of the loan amount. On a $500,000 bridge, that is $7,500 to $15,000 at closing before any payment is made.
- Prepayment penalties. Some agreements include them, though many bridge lenders allow early payoff without a fee. When penalties exist, common structures are a fixed percentage of the remaining balance (often 2 to 3 percent), a step-down that decreases about 1 percent per year, or a yield maintenance calculation that compensates the lender for lost future interest. Read the prepayment language before signing.
- Other closing costs. Appraisal, title insurance, legal review, and UCC filing fees add up. Budget for closing costs comparable to a traditional mortgage closing.
What Secures the Loan
Collateral is the lender’s safety net. In residential bridge loans, that is usually the borrower’s existing home or the new property being purchased. In commercial deals, it may be the target property, other real estate, equipment, or business assets. For real estate collateral, the lender records a mortgage or deed of trust, giving it foreclosure rights if the loan is not repaid. For personal property collateral, the lender takes a security agreement and files a UCC-1 financing statement with the appropriate state authority to establish priority against other creditors. A filed financing statement is effective for five years unless the lender files a continuation.1Legal Information Institute. UCC 9-515 – Duration and Effectiveness of Financing Statement
Most commercial interim loans also require a personal guarantee from the borrower or a principal of the borrowing entity. Even when a commercial loan is structured as non-recourse, lenders carve out exceptions that put the guarantor personally on the hook for specific acts. Unauthorized transfers of the property, voluntary bankruptcy filings, or allowing physical waste to the collateral can each trigger full personal liability for the entire balance. Construction-phase or pre-stabilization bridge loans often go further and require a repayment guarantee covering all or part of the debt until permanent financing is in place.
Exit Strategies and the Risk at Maturity
Every interim loan needs an exit, and lenders scrutinize that plan as closely as the collateral. Three exits are standard: selling the underlying asset, refinancing into permanent financing, or converting through a bridge-to-permanent program with the same lender.
A sale exit works when the borrower is holding the property temporarily. The bridge funded acquisition or improvement; the sale proceeds pay the balance. The risk is the obvious one. If the property does not sell within the loan term, or sells for less than expected, there is a shortfall.
A refinance exit replaces the interim loan with a conventional mortgage or commercial loan once the property is stabilized. For a renovation, “stabilized” means the work is complete and, for commercial property, enough tenants are in place to produce the income the permanent lender needs to underwrite. The transition depends on actually hitting the business plan the bridge was designed to fund.
Bridge-to-permanent programs convert the loan with the same institution once project milestones are met. The process is usually smoother because the lender already knows the borrower and the asset, but the permanent terms are locked in at conversion rather than at origination, so rate movement during the bridge period is a real variable.
The biggest hazard with any interim loan is maturity default: the balloon comes due and the exit has not landed. Beyond the balloon itself, loan agreements commonly impose covenants on the borrower, such as minimum liquidity thresholds, caps on additional borrowing, or insurance requirements on the collateral. Breaking a covenant can trigger a default even when payments are current, giving the lender the right to demand immediate repayment or move against the collateral.
Many bridge lenders offer extensions, but they are not automatic. The lender will review whether the exit plan is still credible, whether the property still supports the loan, and the payment history during the term. Extensions typically carry a fee, often a percentage of the outstanding balance. If an extension is denied, the loan is in default and the lender can pursue foreclosure. The practical defense is building a buffer into the term. If a sale realistically takes 10 months, take a 12- or 14-month loan. The cost of a slightly longer term is modest next to the cost of a maturity default.
Consumer vs. Business-Purpose Loans
Federal protections split sharply depending on whether the bridge is for a personal residence or a business purpose.
When an individual takes out a bridge loan to buy a personal residence, the Truth in Lending Act and Regulation Z require the lender to disclose the annual percentage rate, finance charges, payment schedule, and total cost of credit in a form the borrower can keep.2Consumer Financial Protection Bureau. 12 CFR 1026.17 – General Disclosure Requirements3Consumer Financial Protection Bureau. 12 CFR Part 1026 – Truth in Lending (Regulation Z) The Equal Credit Opportunity Act prohibits discrimination in the loan decision based on race, color, religion, national origin, sex, marital status, age, receipt of public assistance income, or exercise of rights under consumer protection laws.4Office of the Law Revision Counsel. 15 USC 1691 – Scope of Prohibition The Consumer Financial Protection Bureau, created by the Dodd-Frank Act, enforces these rules.5Congress.gov. The Consumer Financial Protection Bureau (CFPB)
One significant gap worth knowing: residential bridge loans are specifically exempt from the Real Estate Settlement Procedures Act, even when secured by a one-to-four-family residential property.6Consumer Financial Protection Bureau. 12 CFR 1024.5 – Coverage of RESPA The standardized Loan Estimate and Closing Disclosure forms RESPA requires for conventional mortgages will not arrive with a bridge loan.
If the loan is primarily for a business, commercial, or agricultural purpose, Regulation Z does not apply.7Consumer Financial Protection Bureau. 12 CFR 1026.3 – Exempt Transactions That covers most commercial bridge loans used for investment property, business acquisitions, or development. Whether a loan qualifies as business-purpose turns on several factors: how closely the acquisition relates to the borrower’s occupation, how actively the borrower will manage the investment, the ratio of income from the property to the borrower’s total income, the size of the transaction, and the borrower’s stated purpose. A bright-line rule simplifies rental property: credit extended to acquire, improve, or maintain a non-owner-occupied rental is automatically business-purpose. For commercial borrowers, protections come through the loan documents, not federal consumer statutes, which makes careful review of the agreement more important.
Tax Treatment of the Interest
How interim loan interest is deducted depends on how the borrowed funds are used.
Interest on a business-purpose bridge is generally deductible as a business expense. Larger businesses face a cap: the deduction for business interest cannot exceed business interest income plus 30 percent of adjusted taxable income for the year, with any disallowed amount carried forward. Small businesses that meet a gross receipts test are exempt from this limit, and real property businesses may elect out under specific conditions, though doing so affects depreciation.8Office of the Law Revision Counsel. 26 USC 163 – Interest
Interest on a consumer bridge used to buy a personal residence may qualify for the mortgage interest deduction if the loan is secured by a qualified residence and the proceeds buy, build, or substantially improve that home.9Internal Revenue Service. Publication 936 (2025) – Home Mortgage Interest Deduction The combined mortgage debt limit for the deduction is $750,000 across all qualified residences, or $1,000,000 for mortgages originated before December 16, 2017. Interest on debt above that threshold is not deductible. Because a bridge loan commonly stacks on top of an existing mortgage before being replaced by permanent financing, running the numbers with a tax professional is worth the hour.