Also known as a bridge loan or bridge financing, a swing loan is a form of temporary financing. It is typically used to provide financing for one entity in anticipation of the sale of something the buyer already owns. The method is used for both private and commercial transactions, usually when a buyer wishes to move quickly on a time-sensitive opportunity. It is a particularly risky and expensive kind of loan that should only be pursued by individuals or organizations with ample financial resources.
Swing loans are often used in the real estate market. When a buyer wishes to buy a new property, such as a home, but has not sold the home currently owned, the loan makes it possible for the new house to be purchased. In many cases, when the other house is sold, part of the proceeds go towards paying off the swing loan.
This type of scenario can be extremely high risk, as usually the borrower will temporarily have three payments to make: the original mortgage, the swing loan, and the new mortgage. As many swing loans are only meant to last for a few months to a year, there is the potential for financial hardship if the borrower’s original property does not sell within the loan period. For this reason, a swing loan can be difficult to obtain unless the buyer demonstrates financial stability and that there is a strong market for the property being sold.
There is also a type of swing loan that requires fewer payments and is less complex. The buyer borrows enough money to pay off the old mortgage and make a down payment on the new mortgage. Payments are made only on that loan until the old property sells. Then the buyer uses the proceeds to pay off the swing loan in full and continues to make payments on the new mortgage.
Several methods can be used to reduce the risk of using a swing loan. Before applying, it is advisable for the buyer to research the current market for the property to be sold. This is to gauge approximately how long it could take to make a sale. The application and payment process can also be greatly eased if all loans involved come from the same financial institution.
Swing loans may also be used by corporate entities to build or maintain business. They can help a new company to get off the ground or keep a failing company afloat until it is sold. The loans may also be used to provide temporary financing during periods of dramatic change.