What Is a Bridge Loan?

If you own your current home and are planning on moving into a new one, a bridge loan can help make the transition go more smoothly, particularly if the closing dates on the sale of your current home and the purchase of your new one don't match up.

A bridge loan is a form of short-term financing that can help you purchase your new home when you don't yet have access to the equity from your current home. The loan essentially allows you to tap into that equity to aid in the financing of the new home.[1]

A bridge loan is typically available to help you buy a new home while you wait for the sale of your existing home.[1] You can typically borrow up to 80% of the combined values of both homes, giving you a couple of options:[2]

1. Use the loan as a second mortgage to put toward the down payment and closing costs on the new home

2. Pay off the mortgage loan on your current home and use the remainder for a down payment and closing costs on the new home

This loan, which uses your first home as collateral, typically has repayment terms ranging from six months to one year. You'll typically repay the loan when you receive the proceeds from the sale of your first home. However, some lenders may offer other repayment options, which may require monthly payments for a set period and a balloon (or big) payment at the end of the term.[3]

"With a bridge loan, both homes must be your principal residence, unlike a traditional mortgage where you can buy or refinance a rental property or vacation home," says Henry Brandt, senior vice president of branch development at Planet Home Lending.

The primary reason to consider a bridge loan is that you don't have to make your offer on the new home contingent upon the sale of your current one. Contingency-free offers are attractive to sellers because they pose less of a risk of falling through.[3]

Because bridge loans are short-term in nature, lenders don't earn much money from servicing the loan. As a result, they typically charge higher interest rates than what you'd pay on a traditional mortgage loan. These loans also come with their own set of closing costs.[2]

Let's say that you're in a seller's market, so you can sell your house relatively quickly but may find it difficult to land a contract on a new home.

The home you're selling is worth $300,000, and you have a $200,000 mortgage on it. The home you're planning to buy is worth $400,000. As a result, you can borrow up to $560,000 with a bridge loan (that’s 80% of the combined values of both homes).

Keep in mind, though, that when you sell your existing home, you’ll ideally get enough from the sale to pay off the bridge loan in full. So, you'd likely want to borrow far less than $560,000. In the scenario above, for example, you might take out a bridge loan of, say, $280,000. That would allow you to pay off the $200,000 balance on your current mortgage and make an $80,000 (or 20%) down payment on your new, $400,000 property.

There are both benefits and drawbacks to using a bridge loan to make the transition into a new home. Here's what you should keep in mind as you consider whether it's the right fit for you.