What's the difference between a construction loan and a bridge loan?

A construction loan funds new ground-up construction or major rehab in scheduled draws as work progresses, with interest-only payments during construction and conversion to permanent financing at completion. A bridge loan is a single lump-sum loan to bridge a gap until permanent financing closes or an asset sells. Different structures, different uses.

When do you use a construction loan?

For ground-up construction or substantial rehab projects where the lender disburses funds in scheduled draws as construction milestones complete. The lender holds back funds until each draw is verified by inspection.

When do you use a bridge loan?

To bridge a gap until something else closes — permanent financing, a property sale, a delayed refinance. Lump-sum at close, repay at exit. Common for buying a property before selling another, value-add deals between acquisition and stabilization, and acquisition closes that beat permanent financing timing.

Which is more expensive?

Bridge loans typically run 10-15% APR; construction loans run 9-13% APR. Construction loans pay interest only on outstanding balance (so the cost is lower in the early months when only foundation work is funded). Bridge loans pay interest on the full balance from day one.

Can a construction loan convert to permanent at completion?

Yes — "construction-to-perm" loans combine both legs in one closing. Save closing costs and lock in permanent financing terms upfront. Pure construction loans require a separate permanent-financing close at completion.

Construction Loan vs Bridge Loan | When Each Fits

Quick answer

Construction loan: funds in scheduled draws as construction milestones complete. Interest-only payments on outstanding balance during build. 12-24 month term, 9-13% APR. For ground-up or major rehab. Often converts to permanent at completion (construction-to-perm). Bridge loan: lump sum at close. Interest on full balance from day one. 6-24 month term, 10-15% APR. For acquisition gaps, value-add holds, or quick-close deals awaiting permanent financing or sale. Construction loan total cost lower because draws ramp; bridge loan simpler structure but more expensive on the same dollars.

Compare CRE short-term financing →

Construction and bridge loans are both short-term commercial real estate products, but they solve very different problems. Most borrowers don't pick the wrong one — they pick the only one their lender offers. This guide compares them on structure, cost, and use case so you can match the right product to your project. For broader context see commercial bridge loans and commercial real estate loans.

How Each Works

Construction loan

Lender approves the total project cost upfront. Funds disburse in scheduled draws (typically 4-8 draws over the construction period) as milestones complete. Each draw requires lender inspection or sign-off. Borrower pays interest only on the outstanding (drawn) balance during construction. At completion, the loan either:

Converts to permanent (construction-to-perm) — same lender, modified terms, no second close
Pays off via separate permanent financing close (more closing costs, more flexibility on permanent lender)

Bridge loan

Single lump-sum disbursement at close. Borrower pays interest (and sometimes principal) monthly on the full balance from day one. At maturity (6-24 months), borrower repays from:

Refinance to permanent commercial mortgage (after stabilization or rehab)
Sale of the property
Sale of another property (1031 exchange, dependent transaction)
Operating cash flow (rare for the full balance)

Side-by-Side

Dimension	Construction Loan	Bridge Loan
Disbursement	Scheduled draws	Lump sum at close
APR	9-13% + 1-2 points	10-15% + 2-3 points
Term	12-24 months	6-24 months
Interest accrual	On drawn balance only	On full balance day 1
Conversion at end	Construction-to-perm or sep close	Pay off via refi or sale
Inspection / draws	Required at each draw	Not required
Best for	Ground-up + major rehab	Acquisition gaps, value-add

When a Construction Loan Fits

Ground-up construction — new building from raw or improved land
Major rehab — substantial value-add where draws against milestone completion makes sense
Predictable construction schedule — draws work well when timeline is stable
Lower cash flow during build — draws + interest-only minimizes carrying cost during construction
Construction-to-perm offered — saves a second close at completion

When a Bridge Loan Fits

Acquisition closing before sale of another property
Quick-close deals where SBA or conventional CRE timing kills the opportunity
Value-add hold periods between acquisition and stabilization, before refinancing to permanent
Cosmetic rehab that doesn't justify a true construction loan
Distressed acquisition with planned exit via sale or refinance after improvement

Cost Example: $1M Project, 12-Month Hold

Same $1M total need, different structures:

Construction loan: 12-month term, 11% APR, 1.5 points origination. Average drawn balance over 12 months ~50% (early months under 30%, late months at 100%). Total interest ~$55K. Points ~$15K. Total: ~$70K.
Bridge loan: 12-month term, 13% APR, 2.5 points origination. Full $1M balance day 1. Total interest: ~$130K. Points: ~$25K. Total: ~$155K.

Construction loan saves ~$85K on the same $1M project for ground-up work. Bridge loan only wins when the project doesn't fit the construction-loan profile (acquisition-only, quick close, no draws to schedule).

Next Step

Defined project + planned exit + timeline = ready to compare. Compare CRE short-term financing — one application reaches construction and bridge lenders.