How a bridge loan works
Say you've found your next home but haven't sold your current one. A bridge loan is secured by the home you're leaving and gives you cash, usually for the down payment and closing costs on the new home. When your current home sells, the sale proceeds pay off the bridge loan.
Some bridge loans also pay off your existing mortgage, leaving one larger short-term loan on the old home. Others sit behind your existing mortgage as a second loan. Terms vary widely from lender to lender.
Why buyers use them
- You can make an offer without a home-sale contingency, which sellers may prefer.
- You move once, straight into the new home.
- You can sell your current home empty, which can make it easier to show and stage.
The trade-offs
Bridge loans fix a timing problem, but they come with real costs and risk.
- Higher rates and fees than a typical mortgage
- Two housing payments, or interest building up, until you sell
- The lender on your new home may count both payments when deciding what you qualify for
- If your home takes longer to sell, or sells for less, you carry the loan longer and keep less equity
A simple example
Your current home is worth $500,000 and you owe $250,000, so you have about $250,000 in equity. A bridge lender might lend against part of that equity, holding back a cushion for selling costs, to fund the down payment on your next home. When your home sells, the proceeds repay the bridge loan and your old mortgage.
This is a hypothetical illustration. Actual amounts depend on the lender, your home's value and your finances.
Alternatives to a bridge loan
Many sellers handle the timing another way:
- A home equity loan before you list. You borrow against your equity while you still live there, then pay it off when you sell. Many lenders, CapCenter included, won't make a home equity loan on a home that was listed for sale recently, so plan ahead.
- A home-sale contingency. Your offer depends on selling your current home. It's easier on your finances but can make your offer less competitive.
- Selling first with a rent-back. You sell, then rent your old home from the buyer for a short time while you close on the next one.
- Savings or other assets for the down payment, if you have them.
Questions to ask before you decide
- How long will my home likely take to sell in today's market?
- Can I afford both payments for six months or more?
- What are the total fees and the rate, and when are payments due?
- What happens if my home hasn't sold when the loan ends?
- Would a contingency or a rent-back work just as well?
Buying and selling together
Lining up the sale and the purchase with one team can make the timing easier. Where we offer realty services, CapCenter's loan consultants and REALTORS® can help you plan both sides, and your agent can write a home-sale contingency if you need your sale proceeds for the down payment.
