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.
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.
The draw schedule difference
The structural difference that matters most is how the money comes out. A construction loan funds in draws against completed work — the lender inspects and releases funds at each stage, and you pay interest only on what has been drawn, which keeps early-project carrying cost low but ties disbursement to verified progress. A bridge loan typically funds in a lump sum up front against existing value, giving you the capital immediately to act, then is repaid from a sale or take-out refinance. So a ground-up build leans construction loan (staged funding, built-in oversight), while an acquisition or a gap you need filled today leans bridge (speed and certainty of funds).
Frequently Asked Questions
What is the difference between a construction loan and a bridge loan?
A construction loan funds in draws against completed work for ground-up building or major renovation; a bridge loan funds a lump sum up front against existing value to cover a short-term gap, repaid from a sale or refinance.
When should I use a construction loan?
For ground-up development or a substantial renovation, where staged draws and lender inspections match the build and keep early carrying cost low by charging interest only on funds drawn.
When is a bridge loan the better choice?
When you need capital immediately — to acquire a property before selling another, or to close fast — and have a clear exit through a sale or take-out refinance to repay it.
Which is cheaper, a construction loan or a bridge loan?
It depends on duration and risk, but both price above permanent financing. A construction loan’s interest-only-on-draws structure can keep early cost low; a bridge is priced for speed. Match the tool to the project rather than the headline rate.
Frequently Asked Questions
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.