Finance

When to Use a Bridge Loan – And When Not To

By Tom Burchnell

A bridge loan is a short-term funding source that enables you to make a down payment on a new home before you sell your current one. Bridge loans are meant to be temporary, so they entail higher interest rates and require some collateral (usually your current home).  A bridge loan makes sense in many situations, but not all. So, how do you know if it’s the right move for you? Let’s take a closer look. 

What Is a Bridge Loan?

A bridge loan is a form of short-term financing that can help you purchase a new home without having to wait for the sale of the one you’re currently living in. Other common names for this type of loan include:

  • Bridge financing
  • Gap financing
  • Interim financing
  • Swing loan

As a short-term loan, you typically need to repay a bridge loan within six months to three years. Rates vary from lender to lender, and you do need to pay closing costs. You’ll also be responsible for various other costs, such as the origination fee, legal fees, and administrative fees. Lenders typically use your current home as collateral to secure the loan. 

Most people who take out a bridge loan do so to make a down payment on a new house. Doing so means that you don’t have to request the purchase of your new home be contingent upon the sale of your existing one, a contingency many home sellers might not be willing to take on. 

The money for a bridge loan comes from the equity in your current home. Once your current house sells, the funds from the sale pay off the remainder of your original mortgage and the bridge loan, leaving you with just your new mortgage. 

There’s one critical thing to keep in mind when it comes to using a bridge loan to buy a new house. If your home doesn’t sell within the period of your bridge loan, you could be stuck paying for the mortgage on your original home, the mortgage on your new house, and the bridge loan. So, while this type of financing does come with several benefits, there’s also risk involved. 

When to Use a Bridge Loan

One of the most common reasons why people use a bridge loan is to purchase a new house before they sell the one in which they currently reside. You can avoid a lot of stress, and you don’t have to worry about making a contingent offer. It can also buy you some time if you find your dream home, but you’re not quite ready to sell yet. 

A bridge loan might be the right move for you if:

  • You’ve found your dream home, and you’re confident you can sell yours in a reasonable amount of time.
  • The seller of the home you want to buy won’t accept a contingent offer.
  • You want to buy a new home before you sell your current one.
  • You can’t afford to make a down payment on a new home without selling your house first.
  • The closing of your house won’t occur until after you close on your new one.

When Shouldn’t You Use a Bridge Loan?

Bridge loans can make sense in many situations, but they’re not right for everyone. You may want to look for a different option if:

  • You have less than 20% equity in your home.
  • You want to sell quickly (before a lender can fully underwrite a bridge loan).
  • Your current house won’t sell in a reasonable amount of time, leaving you stuck paying for two mortgages and the bridge loan. 
  • You’re looking to buy a second home or investment property (while not impossible, these situations make it much harder to qualify).

Bridge Loan Alternatives

So, if a bridge loan isn’t right for you, but you still want to move, what can you do? There are several bridge loan alternatives to consider. 

Home Equity Loan

If you’ve been paying down the mortgage of your current home for a while, you’ve likely built up some equity. You can use that equity in the form of a lump sum loan to help you purchase a new home, avoiding the need for a contingent offer. 

Home Equity Line of Credit

Like a home equity loan, a HELOC provides you with access to the equity in your home. You can use the money to purchase a new house. Where a home equity loan is a lump-sum loan, a HELOC allows you to use your available funds as needed during the draw period, so you only accrue interest on what you’ve used so far. 

An 80-10-10 Loan

An 80-10-10 loan provides you with a mortgage that covers 80% of the home’s purchase price and a second mortgage for 10% of that price. You provide a 10% down payment. When your original home sells, you then use some of the proceeds to pay the 10% second mortgage, leaving you with just one mortgage. 

Sale-Leaseback

If you’re looking for a non-lending alternative to bridge loans, EasyKnock’s MoveAbility program might be right for you. MoveAbility isn’t a loan, it’s a sale-leaseback. You sell your home to EasyKnock and convert your equity to cash. The best part is that you don’t have to move right away. You can stay in your current home for an agreed-upon monthly rent for up to 12 months, while you find a new house. You don’t have to make a contingent offer, and you can use your converted equity as a down payment. The flexibility of this option gives you much greater freedom to handle your move on your terms. 

Key Takeaways

If you’re looking to buy a new home before the sale of your current one, a bridge loan may be able to help. While this financial solution makes sense in some situations, it’s not always the answer. Fortunately, it’s not your only option. With options like a home equity loan and EasyKnock’s MoveAbility program, you can take some of the stress out of buying a new home and take back financial freedom. Talk to a financial advisor to determine which solution would work best for your needs.

Topics:
Bridge Loans
Loans
Tom Burchnell Director of Product Marketing for EasyKnock, licensed real estate agent.

This article is published for educational and informational purposes only. This content is based on research and/or other relevant articles and contains trusted sources, but does not express the concerns of EasyKnock. Our goal at EasyKnock is to provide readers with up-to-date and objective resources on real estate and mortgage-related topics. Our content is written by experienced contributors in the finance and real-estate space and all articles undergo an in-depth review process.