What Is a Bridge Loan?
A bridge loan is a short-term financing solution that allows homeowners to purchase a new home before selling their current one. As the name suggests, it “bridges” the gap between buying a new property and receiving the proceeds from the sale of an existing home.
Bridge loans are typically secured by the equity in your current home. The funds can be used for a down payment on the new home, closing costs, moving expenses, and other costs associated with the transition. They can be especially valuable when:
- You need to move quickly.
- You want to make an offer on a new home before your current home sells.
- You need to access your home equity to help fund your next purchase.
- You are competing in a market where sellers are reluctant to accept contingent offers
Make sure you read through to the end for the really good news about bridge loans!
Understanding the Details
Bridge loan programs vary significantly from lender to lender, so it is important to carefully review the terms before proceeding.
Some lenders require the bridge loan to pay off the existing mortgage on your current home—even if that mortgage has a low interest rate. The lender then advances additional funds based on your remaining equity to help finance the purchase of the new home. Once your current home is sold, the sale proceeds are used to pay off the bridge loan and any remaining mortgage balance.
While this arrangement can provide flexibility, it is important to understand the costs involved.
What to Watch Out For
Bridge loans often carry interest rates that are several percentage points higher than traditional mortgage rates. In addition, since these are short term loans, many lenders structure these loans with substantial upfront costs, including:
- Origination fees
- Discount points
- Underwriting fees
- Closing costs
Some bridge loan programs also require borrowers to obtain their new purchase mortgage through the same lender providing the bridge financing, which greatly limits your financing options.
A Better Alternative
The really good news is that we have identified a bridge loan program with highly favorable terms for well-qualified borrowers!
Key features include:
- No requirement to pay off your existing mortgage
- Low closing costs
- Competitive interest rate (currently Prime + 0.75% to Prime + 1.00%)
- Available even if your home is already listed—or will soon be listed—for sale
- Interest only monthly payments
- No prepayment penalty
Ready to buy your next home before selling your current one?
Let’s discuss how a bridge loan can unlock your equity to secure a down payment. We also offer several alternative strategies to design a winning plan for your transition. Contact us today to explore your options.
