What Is a Bridge Loan and How Does It Work?

A bridge loan is used to span the time between two other mortgages. Say you are in the process of purchasing one home while you sell another. To keep you from having to carry two mortgage payments at the same time plus providing a down payment for the new property, you might seek out a bridge loan.

In certain circumstances, this may be of benefit to you: for example, if you are trying to purchase your new home in a competitive seller’s market. If you are bidding alongside other bidders, they may look more attractive to sellers due to the fact that they have no homes to sell. A bridge loan could help your chances.

How does a bridge loan work? There are several types to choose from.

One type is where the bridge loan completely pays off the existing mortgage. At that point, you just make payments on your new mortgage, then pay off the bridge loan once your existing property sells.

Another type is where you take out an additional mortgage on your existing home and use those proceeds strictly as a down payment on the new property. You would still be carrying two mortgage payments at this point.

Keep in mind that interest rates for bridge loans are much higher than those for traditional mortgages, making them expensive. Another point to note is that they can only be taken out for so long.

Before entering into any bridge loan, you want to be reasonably certain that you are going to be able to sell your existing home at close to the price you need to get for it.

If you find yourself in a situation where a bridge loan could get you from one home to the next, let me help you sort it all out. Call or email, and we can go over the options that work best for you.