What is a Bridge Loan?

By Realty Times Published Aug 30, 2022 04:56 am

A bridge-loan is a term you might need to be familiar with if you’re considering buying a house. It’s something that can be used if you’re buying a new house, but you haven’t yet sold your old one.

When you’re planning to move to a new home, if you’re like most buyers, you might be depending on the money you get from the sale of your current home to buy the new one. The closing dates may not work out, however, and you could find yourself facing a challenging financial situation.

If you have a home currently, and you need the funds from its sale to buy a new home, then you might consider a bridge loan.

The Basics of a Bridge Loan

A bridge loan is a short-term loan that can be used if you don’t have the money on hand to finance your new home without first selling your old one. It’s temporary financing, thus the name bridge. It serves as a bridge between selling your old home and buying a new one.

You can borrow typically up to 80% of the combined value of your current home and the home you want to buy, but lenders vary in their standards.

A bridge loan can help you, just as an example, cover your closing costs on your new mortgage.

You can use it to make an offer without worrying about financing contingencies. A bridge loan can also make you a more competitive buyer if you’re in a hot market. You are in some ways borrowing your new home’s down payment.

A bridge loan is secured by your current home based on the equity you have.

What Are the Upsides of a Bridge Loan?

If you use a bridge loan, you can immediately tap into the equity of your current home, and you don’t have to wait until your old one sells.

You might be able to avoid making monthly payments for a few months, giving you some repayment flexibility.

While there are benefits, there are downsides as well.

For example, you could end up paying more in interest than you would on a home equity loan. You’re also potentially making two mortgages at the same time as you’re accruing interest on your bridge loan. If you’re having a hard time selling your old house, this can quickly escalate into a very stressful situation.

A bridge loan will likely have an origination fee, which can be as much as 3% of your total loan value. Since a bridge loan depends on collateral, you may need to have a certain amount of equity in your home.

Repaying a Bridge Loan

If you decide a bridge loan is right for your particular financial situation, most do have to be repaid within 12 months.

You would theoretically repay the loan with proceeds from the sale of your old home, but there are other options.

Many bridge loans have a balloon payment, where you pay it in full by a certain date.

You might have a few months after closing on a bridge loan before you have to make payments, but this depends on the specifics of your loan.

While a bridge loan can seem like a good option in some cases, you need to weigh the pros and cons in your particular circumstances. There are other options, like a home equity line of credit, that may be more favorable for you.