Bridge Loan
A bridge loan is a short-term loan that helps homeowners buy a new home before selling their current one. It 'bridges' the gap in financing by using equity from your existing home. Bridge loans typically last 6–12 months and carry higher interest rates than standard mortgages.
Suppose you find your dream home but haven't sold your current house yet. Rather than lose the opportunity, you take a bridge loan secured by your existing home's equity to fund the down payment on the new purchase. Once your current home sells, you use the proceeds to pay off the bridge loan.
Bridge loans typically charge 1–2% above standard mortgage rates and often carry origination fees of 1–3% of the loan amount. On a $200,000 bridge loan at 9%, you'd pay roughly $1,500/month in interest-only payments during the bridge period. The short-term cost is significant, but it can be worth it to avoid the stress of selling under deadline pressure.
Not all lenders offer bridge loans, and qualifying can be harder than for a standard mortgage since lenders assess your ability to carry two properties simultaneously. Some buyers instead use home equity lines of credit (HELOCs) or 401(k) loans as less expensive alternatives to accomplish the same goal.
Key Takeaway
A bridge loan is a short-term loan that helps homeowners buy a new home before selling their current one. It 'bridges' the gap in financing by using equity from your existing home. Bridge loans typically last 6–12 months and carry higher interest rates than standard mortgages.
Related Terms
Frequently Asked Questions
Most bridge loans are due in 6–12 months, giving you time to sell your existing home and pay off the loan.
Bridge loan rates are typically 1–3% higher than conventional mortgage rates, reflecting the short-term nature and higher risk.
A HELOC on your current home, a contingency offer, or negotiating a rent-back from your buyer are common alternatives that may be cheaper.
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