What Is a Bridge Loan — And Is It Right for You?

With the current real estate market in so much flux, many borrowers are looking for creative solutions, or out-of-the-box suggestions, to purchase their dream home. With properties sitting on the market longer than they used to just three months ago, some people are looking for a quicker way to access their home’s equity to use as a down payment. Enter the bridge loan, a unique lending option that can help hopeful home buyers close on a new home before their current one has sold.

A bridge loan is a type of mortgage that borrows some of the equity you have in your current home before you sell. To calculate how much equity you have, take the estimated value of your home and subtract the amount you still owe. That figure is what you stand to make when you sell your property (minus real estate agent fees and other costs associated with the sale of your property). 

“A bridge loan allows a buyer to ‘bridge the gap’ between the time they need to purchase a new home and have sold their existing home,” according to Melissa Cohn, Regional Vice President at William Raveis Mortgage. 

A bridge loan can be secured as a first mortgage (for borrowers who own their home free and clear) or as a second mortgage (for those borrowers who currently carry an existing mortgage) on a primary residence. “Banks will typically lend up to 80 percent of the value of the current home,” Cohn says, adding that unlike with a traditional cash out refinance, your property can be listed for sale. 

Just like a standard mortgage, this loan will be secured against your home. Failure to pay back the loan in the agreed upon terms could result in forfeiting your property by way of a foreclosure, which could have negative ramifications on your credit for years, which is why it’s very important to make sure that you can continue to carry the monthly cost of the bridge loan, as well as your current mortgage payment, and the new payment on the property you’re looking to buy.

Just like so many other financial decisions, there are pros and cons of opting to use a bridge loan. According to Cohn, some of the perks include:

• Tapping into your home’s equity before you sell: Cohn believes this is especially important considering how much home values have gone up in recent years.
• Giving you quicker access to funds: By allowing you to use your money more quickly, you can may be able to have a purchase offer accepted, which may give you a leg up in a bidding war

On the flip side, Cohn says some borrowers may see these major downsides:

• Greater qualifications: In many cases, you have to be able to qualify for the monthly obligation of all three potential mortgages (the bridge loan payment, your current payment, and the payment on your new home).
• Cost: Bridge loans can be very expensive and generally have points to pay upfront. Because they are short-term loans, they don’t accrue as much interest for the lender as a long-term loan will. 

If you’re on the fence about taking out a bridge loan, Cohn says that there are some other options that you should consider, including a cash out refinance of your existing home. Doing this could allow you to take advantage of lower interest rates than what you would find on a bridge loan while still giving you early access to some of your home’s equity. 

For those who think a bridge loan is their best option, Cohn says that there are a number of lenders that offer bridge loans. If you currently have a pre approval to purchase your new home you should start with your lender to see if they offer bridge loans (and verify that using a bridge loan won’t change the terms of your prequalification). 

With so many costs associated with home-buying, bridge loans are a great alternative if you already own a home. But consider if you qualify first, and remember that they have greater costs associated with them, which can outweigh the many benefits.