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A bridge loan is a short-term loan that gives you cash until you secure long-term financing. It can help if you want to buy a new home before selling your current one. It's worth thinking through your options carefully before you apply.
How a bridge loan works
Bridge loans, also called gap financing or swing loans, give you short-term funds by tapping the equity in your current home. Lenders may offer access to as much as 80% of your home's value. You don't have to wait for your current home to sell before you buy the next one.
The funds can cover things like inspection fees, closing costs, and your down payment. That can improve your buying power in a competitive market, no matter when your existing home sells.
How and when you repay it
- Terms vary by lender, and bridge loans are often repaid within 3 to 12 months
- Some lenders let you delay monthly payments until the loan closes
- Most end with a balloon payment, which is due in full at the end
- Repayment usually comes from the proceeds of selling your current home
- If your home takes longer to sell, your lender may extend the loan, usually by no more than a few months
Pros and cons
Pros
- The freedom to buy a new house before selling your current one
- Extra cash flow during your first couple of months in the new home
- No sales contingency, which can make your offer more competitive
Cons
- Higher interest rates and APR than other loan types
- Some lenders require you to get your mortgage through them
- Generally unavailable if you don't have about 20% equity in your current home
When a bridge loan can make sense
- To buy before you sell. Closing dates rarely line up. Without a bridge loan, you'd typically need a sales contingency, so your purchase only completes after your current home sells.
- For your down payment and to avoid PMI. With less than 20% down on a conventional loan, you'll generally pay private mortgage insurance. A bridge loan can help fund a full 20% down payment.
- For the first couple of months. Funds can cover moving costs or repairs the seller didn't address. Depending on the lender, you may defer payments or make interest-only payments until you sell.
When to think twice
- If you want to avoid higher rates. Bridge loans cost more than most other loans, including your mortgage.
- If you don't have 20% equity. Recently purchased homes may not qualify.
- If you don't want two mortgages at once. Carrying two loans can complicate your finances and raises the risk of foreclosure if you can't keep up with payments.
Bridge loan vs. HELOC
A home equity line of credit (HELOC) also taps your equity and can be an alternative. It works like a credit card: you can draw funds up to a limit and keep drawing as you repay.
- HELOC advantages: It's useful for ongoing costs, such as home improvements, when the total amount isn't known. It doesn't carry the high bridge-loan rates, and the interest may be tax-deductible. There is a draw period followed by a repayment period.
- Bridge loan advantages: It's better for large lump sums, such as a down payment, which a HELOC typically doesn't provide. It's also simpler to budget for, while a HELOC can lead to overspending and surprise debt when repayment begins.
Is a bridge loan right for you?
A bridge loan can let you buy your next home without lowering the price of the one you're selling, and it can make your offer stronger because you don't need a sales contingency. The higher cost and short timeline are the trade-offs.
See how our process works here, or reach out and our team will help weigh your options.
Terms, rates, and availability vary by lender and borrower. This is general information, not a loan commitment.
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