An interim loan is a short-term financing arrangement, typically running 6 to 36 months, that puts money in your hands quickly and gets repaid once you sell an asset or close on permanent financing. It’s also called a bridge loan or swing loan. You make interest-only payments during the term, and the full principal comes due as a single balloon payment at maturity. Interest rates run higher than a conventional mortgage because the lender is taking on a short, lightly underwritten position and betting on your exit.
How the Loan Is Structured
The design is simple on purpose. Get funds out fast, keep monthly carrying costs low while you hold the position, and collect everything back in one payment at the end.
During the term, you pay interest only. No principal comes down. When the maturity date arrives, the entire original balance is due at once. That balloon is the defining feature of interim financing, and it is also where the risk lives. If your sale slips or your refinance doesn’t close on time, you owe the full amount with no built-in cushion.
Underwriting looks different from a conventional mortgage. Loan-to-value ratios typically cap around 80 percent, so you need at least 20 percent equity or a 20 percent down payment. Your debt-to-income ratio matters less than usual. What the lender really wants to see is a credible exit: proof that a sale, refinance, or other permanent loan will close before the balloon comes due.
When People Use an Interim Loan
The most familiar use is a homeowner buying a new house before selling the current one. The interim loan supplies the down payment or purchase price for the new home, secured by equity in the existing one. When the old house sells, those proceeds retire the loan. It removes the need to line up two closings on the same day or to write a purchase offer contingent on selling.
Commercial borrowers use interim loans more broadly. An investor might close quickly on a competitive deal and then refinance into a permanent commercial mortgage later. Developers use them to span the gap between finishing construction and locking in long-term financing based on the stabilized property’s income. Businesses lean on them during acquisitions when the deal timeline doesn’t match up with permanent lending.
Interim Loan vs. Construction Loan
These two get confused often, and the difference matters. A construction loan releases funds in stages as the project hits milestones, and its term runs through the build. An interim loan hands over the full amount upfront in a single disbursement. If you need money to actually build something, a construction loan is the right tool. If you need cash to hold a position while permanent financing is arranged, that’s what an interim loan is for.
What an Interim Loan Costs
Interim financing is expensive next to conventional lending, and every layer of cost needs to be in your budget before you sign.
- Interest rate. As of 2026, bridge loan rates generally sit between 10 and 12 percent, depending on location, leverage, and loan structure. Conventional mortgages typically run in the 6 to 7 percent range. The spread is the premium for speed and short-term risk.
- Origination fees. Lenders charge roughly 1.5 to 3 percent of the loan amount at closing. On a $500,000 bridge loan, that’s $7,500 to $15,000 before you’ve made your first payment.
- Prepayment penalties. Some agreements include them, though many bridge lenders allow early payoff without a fee. When penalties do apply, common structures are a flat percentage of the remaining balance (often 2 to 3 percent), a step-down that decreases by roughly 1 percent per year, or a yield-maintenance calculation that compensates the lender for lost future interest. Read this section closely.
- Closing costs. Appraisal, title insurance, legal review, and UCC filing fees add up to something comparable to a traditional mortgage closing.
What You Sign and What You Pledge
An interim loan involves several documents, and each one carries obligations you’ll be living with.
Loan Agreement
The loan agreement is the primary document, spelling out the amount, interest rate, repayment schedule, fees, and events of default. For consumer-purpose loans, the Truth in Lending Act requires the lender to present the credit terms clearly in a form you can keep, including the annual percentage rate, finance charges, and total payments over the loan’s life.1Consumer Financial Protection Bureau. 12 CFR 1026.17 – General Disclosure Requirements
Promissory Note
The promissory note is your written promise to repay. It records the principal, interest rate, maturity date, payment schedule, and late payment penalties. The loan agreement governs the broader relationship; the note is the enforceable instrument the lender uses to pursue collection if you default.
Security Agreement and UCC Filing
If the collateral is personal property rather than real estate (equipment, inventory, receivables), the lender takes a security agreement and files a UCC-1 financing statement with the state to establish priority over other creditors. A filed financing statement stays effective for five years. If the lender doesn’t file a continuation before it expires, the security interest becomes unperfected and loses its priority.2Legal Information Institute. UCC 9-515 – Duration and Effectiveness of Financing Statement
Collateral and Personal Guarantees
In a residential bridge, the collateral is usually the existing home, the new property, or both. In commercial deals, it might be the target property, other real estate, or business assets. For real estate collateral, the lender records a mortgage or deed of trust rather than a UCC filing, which gives it the right to foreclose if you default.
Most commercial interim loans also require a personal guarantee from the borrower or a principal of the borrowing entity. Even where the loan is nominally non-recourse (limiting the lender to the collateral), lenders carve out “bad boy” exceptions that trigger full personal liability. Unauthorized property transfers, voluntary bankruptcy filings, and physical waste to the property are typical triggers. Construction-phase or pre-stabilization bridge loans often go further and demand a repayment guarantee covering all or part of the debt until permanent financing takes over.
Exit Strategy and What Happens If You Miss
Every interim loan needs a planned exit, and the lender will underwrite that plan as carefully as it underwrites the collateral. There are three standard ones.
A sale exit works when you’re holding an asset temporarily. Proceeds from the sale pay off the balance. The risk is direct: if the property doesn’t sell within the term, or sells short, you have a shortfall to cover.
A refinance exit replaces the interim loan with a conventional mortgage or commercial loan once the property is stabilized. For a renovation project, stabilized means the work is done and (for commercial buildings) leased to tenants producing sufficient income. Permanent lenders underwrite the property as it now stands, so this exit depends on actually completing the business plan the bridge loan financed.
A bridge-to-permanent conversion keeps you with the same lender through both phases. The conversion is generally smoother because the lender already knows you and the property, but the permanent-loan rate is set at conversion, not origination, so rate movement during the bridge period is a real variable.
Beyond making payments, most interim loan agreements include covenants: minimum liquidity, caps on additional borrowing, insurance requirements. Break a covenant and you can be in default without ever missing a payment, and the lender can demand full repayment or move on the collateral.
The biggest risk is maturity default: the loan comes due and you can’t pay it off. Many bridge lenders offer extensions, but they aren’t automatic. The lender will look at whether your exit is still credible, whether the property still supports the loan, and how you’ve paid during the term. Extensions usually come with a fee tied to the outstanding balance. If an extension is denied, the loan is in default and the lender can foreclose.
The practical answer is to build a buffer into the term. If you realistically need 10 months to sell, take a 12- or 14-month loan. The added interest costs far less than a maturity default.
What Legal Protections Apply
The rules split sharply by purpose, and the split determines what protection you actually have.
Consumer-Purpose Loans
When an individual takes a bridge loan to buy a personal residence, the Truth in Lending Act (through Regulation Z) requires the lender to disclose the APR, finance charges, payment schedule, and total cost of credit.3Consumer Financial Protection Bureau. 12 CFR Part 1026 – Truth in Lending (Regulation Z) The Equal Credit Opportunity Act also prohibits discrimination based on race, color, religion, national origin, sex, marital status, age, receipt of public assistance income, or the exercise of rights under consumer protection laws.4Office of the Law Revision Counsel. 15 USC 1691 – Scope of Prohibition
One gap worth knowing: residential bridge loans are specifically exempt from the Real Estate Settlement Procedures Act. RESPA’s disclosure and anti-kickback provisions don’t apply to bridge or swing loans, even when the lender takes a security interest in a one-to-four-family residential property.5Consumer Financial Protection Bureau. 12 CFR 1024.5 – Coverage of RESPA You won’t get the standardized Loan Estimate and Closing Disclosure forms required for a conventional mortgage.
Business-Purpose Loans
If the loan is primarily for a business, commercial, or agricultural purpose, Regulation Z doesn’t apply. The lender owes you no TILA disclosures.6Consumer Financial Protection Bureau. 12 CFR 1026.3 – Exempt Transactions That covers most commercial bridges used for investment property, business purchases, or development. One bright line simplifies rental property: credit extended to acquire, improve, or maintain a non-owner-occupied rental is automatically business-purpose.
The practical result for commercial borrowers is that your protections come from the loan documents themselves, not from federal consumer law. That makes careful legal review of the agreement significantly more important.
Tax Treatment of the Interest
How you deduct interim loan interest depends on how you used the money.
For business-purpose loans, interest is generally deductible as a business expense. Larger businesses face a cap: the deduction for business interest can’t exceed business interest income plus 30 percent of adjusted taxable income for the year, with any disallowed amount carried forward. Small businesses meeting a gross receipts test are exempt from the cap. Real property businesses may elect out under specific conditions, though the election affects depreciation.7Office of the Law Revision Counsel. 26 USC 163 – Interest
For consumer bridge loans used to buy a personal residence, the interest may qualify for the mortgage interest deduction if the loan is secured by a qualified residence and the proceeds are used to buy, build, or substantially improve that home.8Internal Revenue Service. Publication 936 (2025) – Home Mortgage Interest Deduction The combined 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 any amount above that isn’t deductible. Given how easily a bridge stacks on top of an existing mortgage, this is a good place to run the numbers with a tax professional before signing.