Bridge Loans: What They Are and How They Work

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Are you getting ready to sell your home and move to a new one? Handling these two tasks together can be tricky and might put stress on your finances. This is especially true if you’re like many buyers who want to use the money from selling your current home to buy the new one.

Luckily, there’s something called a bridge loan that can make this process smoother. Let’s explore what bridge loans are and how they can help.

What is a bridge loan?

A bridge loan is a short-term loan that’s helpful for those in a transitionary period, such as moving from one house to another or relocating for work. This type of loan can assist with the expenses of buying a new house, such as covering the down payment or handling mortgage payments for two properties at once.

Bridge loans usually use your current home as collateral, similar to how regular home loans, home equity loans, and home equity lines of credit (HELOCs) work. But sometimes, you can use other assets as collateral instead.

how does a bridge loan work?

Bridge loans, also known as interim financing, gap financing, or swing loans, step in when you need money but can’t wait for regular financing. These loans are used by both individuals and businesses, and lenders can make them fit many different situations.

For homeowners, bridge loans come in handy when you want to buy a new home but your current one hasn’t sold yet. You use the money tied up in your current home to make the down payment for the new place while you wait for your current home to sell.

For example, imagine you want a new home but the money isn’t quite ready. A bridge loan can help you out, especially for things like closing costs. While the terms can be different, usually you can borrow up to 90 percent of the value of both your current home and the new one you’re eyeing.

To get a bridge loan, your lender will check stuff like how much money you owe compared to what you earn, how much your home is worth, your credit score, and maybe how much your household makes. If you’ve been good at paying your mortgage for your first home, that’s a plus. But if your current home isn’t worth a lot, it might be tough to get this kind of loan. If the lender thinks you’re a great fit, getting approved for a bridge loan can be faster than the regular mortgage process.

Bridge loan highlights

Bridge loans offer several advantages for homeowners and buyers in a competitive market. Here are just a handful of them.

  • Short-term loan: Get a short-term loan to buy a new property while selling your old one.
  • Use home equity: Access your home equity to secure a down payment to help buy a new one.
  • Avoid iBuyers: Steer clear of iBuyers, like Opendoor and Offerpad, who want to buy your home at a price below market value.
  • Hassle-free offers: Make a contingency-free offer to stand out in a seller’s market.
  • Fast closing: Close the deal in as little as 5 days.
  • No need to wait: Instead of saying, “I’ll only buy this new home if my old one sells,” a bridge loan lets you get the new home without waiting for the old one to sell first.
  • Avoid private mortgage insurance (PMI): If you use your bridge loan to put down at least 20% or more, you might not have to pay for mortgage insurance.

Bridge loan alternatives

There are several alternatives to a bridge loan that individuals can consider based on their financial situation and needs. Here are a few options:

  • Home Equity Loan: Home equity loans are a popular alternative to bridge loans. They are a type of second mortgage that uses the equity in your home as collateral. You receive the funds in a lump sum upfront and can pay it back over a longer time period with lower interest. But be careful, while home equity loans can be more affordable than bridge loans, it’s important to remember that opting for a home equity loan still means carrying two mortgages if you purchase a new home and can’t sell your original home quickly.
  • Home Equity Line of Credit (HELOC): Another option is a home equity line of credit or HELOC. A HELOC is a revolving line of credit that works much like a credit card but with a substantially lower interest rate. HELOCs have lower costs and interest rates than bridge loans, and you have more time to pay it back. Plus, you can use the borrowed money to make your home even nicer by doing improvements or upgrades.
  • Cash-Out Refinance: With a cash-out refinance, you replace your current mortgage with a new one that has a higher balance. The difference between the old and new mortgage amounts can be taken as cash, which can then be used for your new home purchase.
  • 1031 Exchange: If you’re selling an investment property, a 1031 exchange allows you to defer capital gains taxes by reinvesting the proceeds into another investment property within a specific timeframe.
  • 401(k) Loan: If you have a 401(k) retirement account, you might have the option to take out a loan against it. This allows you to borrow money from your retirement savings and pay it back over time, typically with interest.

the bottom line

In specific situations, a bridge loan can prove to be a valuable tool, especially when you’re faced with the need to purchase a new home before successfully selling your current one. By securing a bridge loan, you can access additional funds to facilitate your real estate transactions.

Whether you should apply for a bridge loan depends on your financial situation and how far you are in the buying and selling process. Ask us about our Dream Home Bridge Loan to see if we can help you bridge the gap.

Questions? Live chat with one of our loan consultants for personalized advice. Use our free mortgage and amortization calculators to calculate your monthly payment, including insurance, taxes, and interest.

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