Definition:
A bridge loan is a short-term loan used to provide immediate financing, typically allowing homeowners to buy a new home before selling their current property.

Example:
Suppose Sarah finds her dream home but hasn’t yet sold her existing property. She takes out a bridge loan to cover the down payment and initial costs of the new home. Once her old home sells, Sarah pays off the bridge loan with the proceeds.

Explanation:
Bridge loans "bridge" the financial gap between buying a new property and selling an existing one. They're typically short-term (usually 6 months to 1 year), carry higher interest rates than standard mortgages, and often require collateral, usually the borrower’s existing home. Lenders grant bridge loans based on the equity and marketability of the borrower’s current home.

Homeowners commonly use bridge loans to ensure they don’t lose out on their next home due to timing issues. This allows greater flexibility, preventing the stress and inconvenience of temporary housing or missing opportunities.

Importance:
Understanding bridge loans is essential because they offer buyers immediate financial flexibility when transitioning between properties. However, they're not without risks—if the existing home doesn't sell promptly, borrowers face substantial interest costs or financial strain.

Buyers must carefully evaluate their financial situation and local real estate market conditions before choosing this route. For sellers, awareness of bridge loans can facilitate smoother transactions by allowing potential buyers more financial flexibility, potentially leading to faster closings.

In short, bridge loans can effectively manage timing gaps between property transactions, but buyers should approach them with clear financial planning and caution.