Bridge Loan
A bridge loan is a short-term secured loan that allows a homeowner to use the equity in their current property to fund the purchase of a new home before the existing home is sold. Bridge loans typically carry terms of and higher interest rates than conventional mortgages.
What This Means
When Bridge Loans Are Used
Bridge loans solve a timing gap that occurs when a borrower needs to close on a new home before their current property sells. Without bridge financing, the borrower would need to either make the new purchase contingent on the sale (weakening their offer) or carry two full mortgage payments simultaneously. The bridge loan provides temporary capital secured by the existing home's equity, which is repaid when the current home sells.
Structure and Terms
Bridge loans are typically structured in one of two ways:
- Lump sum with balloon payment - The borrower receives the loan proceeds at closing and makes interest-only payments (or no payments) until the existing home sells, at which point the full balance is due.
- Second lien - The bridge loan sits behind the existing mortgage as a second lien, providing the borrower with down payment and closing cost funds for the new purchase.
Interest rates on bridge loans are generally than standard mortgage rates. Lenders also charge origination fees, often of the loan amount. Combined with the short repayment window, bridge loans are a relatively expensive form of financing.
Qualification and Risks
Lenders evaluate the borrower's ability to carry both the bridge loan and the new mortgage, even temporarily. Strong credit, significant equity in the current home, and a realistic sales timeline are essential. The primary risk is that the existing home does not sell within the bridge loan term, potentially forcing a refinance, price reduction, or default.