Key Takeaways
- A bridge loan is short-term financing that uses your current home equity to fund the purchase of your next home.
- It solves the timing problem of needing to buy before your existing home sells.
- Bridge loans carry higher rates and fees and are meant to be repaid quickly, usually once your old home sells.
- Alternatives include a HELOC, a contingent offer, or a delayed closing, depending on your situation.
Buying a new home while still owning your current one creates a timing squeeze: you need the equity from your old home for the down payment, but it has not sold yet. A bridge loan closes that gap. Here is how bridge financing works and when it makes sense.
What is a bridge loan?
A bridge loan is short-term financing, often lasting six months to a year, that lets you tap the equity in your current home to buy your next one before the first sells. It literally bridges the period between the two transactions. Once your old home sells, you use the proceeds to pay off the bridge loan.
How does a bridge loan work?
The lender secures the loan against your current home, your new home, or both, giving you funds for the down payment and sometimes to pay off your existing mortgage. During the bridge period you may make interest-only payments, or in some structures no payments until the home sells. When the sale closes, the bridge loan is repaid in full.
What do bridge loans cost?
Because they are short-term and higher-risk, bridge loans typically carry higher interest rates and fees than standard mortgages. You may also carry two housing payments at once if your old home lingers on the market. The convenience of buying without a sale contingency comes at a real cost, so weigh it against the alternatives.
What are the alternatives to a bridge loan?
You might use a home equity line of credit on your current home for the down payment, make your purchase offer contingent on selling your existing home, negotiate a rent-back so you can close your sale and purchase closer together, or simply sell first and rent briefly. Each option trades cost, convenience, and competitiveness differently. A loan officer can help you compare them for your timeline.
Frequently Asked Questions
How long do you have to repay a bridge loan?
Most bridge loans are due within six months to a year, ideally paid off as soon as your current home sells. Read the terms carefully so you know the deadline and any extension options.
Is a bridge loan hard to qualify for?
Lenders look at your equity, credit, and ability to carry the payments. You generally need substantial equity in your current home and enough income or reserves to handle overlap, since you may temporarily hold two mortgages.
Should I use a HELOC instead of a bridge loan?
A HELOC on your current home can be a cheaper way to access equity for a down payment, but it must be opened before you list, and lenders may restrict new HELOCs on a home that is for sale. Compare both with your loan officer.
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Working through this in Colorado? I’m David Silva, a mortgage loan officer based in Westminster, CO (NMLS 1352284), licensed in Colorado, California, Georgia and Texas. Take a look at DSCR investor loans or fix & flip and bridge financing — or send me your scenario and I’ll tell you straight whether it works.
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