How Does a Bridge Loan Work?
A bridge loan uses your current home equity as collateral. The lender provides funds for the down payment and possibly closing costs on your new home. You then carry two mortgages plus the bridge loan temporarily. Once your original home sells, you repay the bridge loan with the proceeds. Some bridge loans require interest-only payments; others defer all payments until the original home sells.
What Are the Costs and Risks?
Bridge loans carry higher interest rates (typically 1-2% above standard mortgage rates), origination fees of 1-3%, and closing costs. The biggest risk is that your current home does not sell quickly or at the expected price, leaving you carrying three payment obligations. If the market softens or your home sits unsold past the bridge loan term, you could face financial strain or forced sale at a lower price.
When Does a Bridge Loan Make Sense?
Bridge loans work best in strong seller's markets where homes sell quickly and you have significant equity. They are ideal when you have found your next home and cannot afford to wait, when the timing of a simultaneous close is impossible, or when a contingency to sell your current home would weaken your offer. They are less suitable in slow markets or when you have minimal equity.
Frequently asked questions
What are alternatives to a bridge loan?
Alternatives include a home equity line of credit (HELOC), a contingent offer on the new home, selling first and renting temporarily, or negotiating a rent-back agreement with your buyer. Each has tradeoffs in cost, convenience, and risk.
How do I qualify for a bridge loan?
Lenders typically require at least 20% equity in your current home, a strong credit score, and low debt-to-income ratio. You generally need to qualify for holding both mortgages simultaneously, since the lender assumes a worst-case scenario where your current home does not sell immediately.