What is a bridge loan?

Bridge loans are a type of short-term loan designed to help borrowers meet their financial obligations right away — often while they wait for a larger loan to become available. These loans tend to allow for quick closings, so homeowners commonly use bridge loans as financing between more permanent loans and during transitional times.

Key insights

• A bridge loan is a short-term loan designed to help cover costs while you wait for a longer-term loan.
• These loans are typical for homebuyers waiting for their current homes to sell.
• Bridge loans are generally secured and often have higher interest rates.
• Many bridge loan lenders require you to have at least 20% equity in your current home.

How bridge loans work

Bridge loans are a type of interim financing (or gap funding) used when a more permanent loan solution isn’t yet available. It’s possible to use them for all kinds of purchases, but they’re frequently associated with mortgages.

Consider this scenario: You find a home you want, but you can’t secure a mortgage for the new home until you pay off your existing loan by selling your current home (it can be difficult to qualify for two significant loans at once).

This is where a bridge loan may help. You could use the equity in your current home to help make the new down payment. This gives you time to sell your home and pay off your existing mortgage with the proceeds.

“Bridge loans can be a great way to finance a new home purchase before your old home has sold. However, they can also be confusing, and it's important to approach them with care,” according to Jeremy Luebke, founder of We Love Land, a property buying company in Dallas, Texas. 

“First, make sure you understand the terms of the loan,” he said. “Bridge loans typically have high-interest rates and short repayment periods, so it's important to know how much you'll need to pay back and when. Second, consider the timing of your purchase carefully.”

If you need to sell your current home to repay the loan, he said to “make sure you have a realistic timeline for finding a buyer.” 

Remember: If your old home doesn't sell quickly or if interest rates rise between loans, you could end up in a painful financial situation.

Bridge loan requirements and rates

As with most loans, qualifying for a bridge loan depends on many factors, including your credit score, income and debt-to-income ratio. The specific requirements vary by lender, though; some are more lenient than others. Most bridge loans have six-month to one-year repayment terms, and, in most situations, the borrower’s old home secures the bridge loan. 

Rates for bridge loans vary significantly (mortgage rates change constantly), but you can expect a rate anywhere from the prime rate to the prime rate plus roughly 2% with a bridge loan. That would indicate a typical range of about 6% to 10% over the last 20 years; however, recent rates have reportedly gone as high as 16%.

Reasons to get a bridge loan

Bridge loans come in handy when current homeowners need help with a new down payment to purchase their next home or when they need help staying afloat financially between selling the existing home and buying a new one. These loans can also go toward purchasing property or land for new construction, but they shouldn't be confused with new construction loans).

Here’s an example of when a bridge loan can be useful: Say your current home is worth $150,000, but you owe just $30,000 on it. You want to buy a new home, but you don’t have the money for a down payment right now and you haven’t been able to sell yet.

With a $100,000 bridge loan, $30,000 could go to paying off what you owe on your existing mortgage, and a few thousand more would go to closing costs for your bridge loan. The remainder could go towards a down payment on a new home. When you sell your current home, you could use the funds to cover the cost of the bridge loan.

You could also apply almost all of the funds from your bridge loan to your new down payment, but that wouldn’t take care of your existing mortgage — you’d have to make two mortgage payments until your old home sells.

Maria Saenz, chief executive officer of FastTitleLoans, shared her personal experience with a bridge loan: “Buying a home with a bridge loan was one of the best decisions I've ever made. I didn't have a lot of credit or assets to put down, so my savings weren't enough. … In the end, my bridge loan was paid off in full, and for that reason, I recommend it to anyone looking to buy a house."

Bridge loan pros and cons

Bridge loans offer a number of benefits for qualified borrowers, but there are some downsides to consider.

Pros

• Fast cash: Bridge loans tend to close quickly. That makes them attractive to borrowers who need the funds soon.
• Buy now: With a bridge loan, you don’t have to wait to sell your home before buying a new one. You may be able to tap into equity rather than waiting to save for a separate down payment.
• Short-term solution: Bridge loans can provide short-term financial stability when you need a bit of help.
• Interest-only or deferred payments: Some bridge loans offer interest-only payment models, which can reduce your monthly payment. Other bridge loans may let you avoid making payments for several months, depending on your loan terms. Just be aware that you will eventually have to pay back the full loan amount.

Cons

• Higher interest rates: Even with good credit, borrowers can expect to spend a bit more on a bridge loan.
• Shorter terms: These aren’t the typical 30-year loans you find in many real estate purchases — most have repayment terms of under one year. Some lenders won’t renew the loan or extend it if you can’t get a more permanent solution quickly.
• Limited funding: Lenders often cap bridge loans at 80% of the combined value of the two properties in question, and some lenders require you to have 20% equity in your current home.
• Owning two homes at once: In some situations, you may own two homes for a short period of time, such as when you’re waiting to sell your home. This could get overwhelming, even if the bridge financing helps with funding.

Bridge loan alternatives

It’s important to consider all options before deciding on a loan. There are several alternatives to bridge loans you’ll want to look at before committing:

Personal loans

Personal loans can help you secure a significant amount of money — sometimes without collateral if you have good credit. Personal loans are more versatile than other types of financing; you can use them pretty much however you like.

Home equity loans

Home equity loans stem from your home equity (the unmortgaged value of your home). These loans tend to have low interest rates compared with most other secured and unsecured loans. If you have a significant amount of equity in your home, this may be one of the most accessible options. These loans may also have longer terms, which means more time for repayment.

Home equity line of credit (HELOC)

A home equity line of credit is also based on the equity in your home. What makes it different from a home equity loan is that you can repeatedly borrow from your credit line without needing to take a lump sum upfront, and you only pay interest on the money you take from your predetermined borrowing limit. Much like with a credit card, you can use the available credit again after you pay it down.

Bottom line

A bridge loan can be a powerful borrowing tool if you need access to fast cash for real estate, especially if you’re buying a home before selling your current property. Though they carry a higher interest rate, they’re a legitimate option for qualified borrowers and can help you get into your new home quickly, even if it takes a while to sell your old one.