Bridge Loan in Real Estate

What is a “bridge loan”?  It is a temporary loan used while permanent financing is being secured. Bridge loans often have higher interest rates. They allow a homebuyer to take out a loan against their current home to make the down payment on their new home. This may be a good option for you if you want to buy a new home before your current home has sold.

A bridge loan is dependent on the equity of your current home. Your equity is the difference between the value of your home and what you owe on your current mortgage. Many lenders provide the borrower with the difference between their current loan balance and up to 80% of the current home’s value.

With this new loan, borrowers can cover the down payment and closing fees on their new home.

Pros of a Bridge Loan:

• You don’t need to have selling contingencies of your current home to make an offer on a new home.
• Application and closing are often quicker than other loans.
• Depending on the lender, the bridge may not have any payments until the deal is closed. Some lenders may require interest-only payments until the deal closes.

Cons of a Bridge Loan:

• You must have excellent credit and a low debt-to-income ratio.
• There are often origination and legal fees.
• Paying two closing costs – one on the bridge loan as well as the new home.
• Lenders charge higher interest because these loans have such a short lifespan. The work involved for the lender is equivalent to a comparable longer-term loan.
• Terms are generally 6 months to 2 years.
• While some bridge loans have fixed interest rates, others can have a variable rate that may rise before the loan is paid off.
• If your primary home doesn’t sell, you could end up with three mortgages: one on the primary home, one on the new home, and the third being the bridge loan.
• Bridge loan lenders can be difficult to find.

The Bottom Line: Bridge loans are short-term loans that help a buyer purchase a second property when they have not yet sold their primary property. There are tough qualifications and some challenges for someone to be able to obtain two mortgages at once, thus the bridge loan offers a solution. Bridge loan borrowers will have more freedom and flexibility, but will also face some negatives like high interest rates and closing costs. It’s important to compare all the benefits and the negatives before making a bridge loan commitment.