What is a bridge loan?

What is a bridge loan?

It has become common to see home buyers getting a bridge loan in order to buy another home before they sell their existing one.  At first glance, it seems like a great solution – and it can be -, but just like all other scenarios when it comes to mortgages, it is not risk free and deciding whether or not it is right for you depends on a few factors. 

Let’s see: Bridge loans, also known as Interim Mortgage Financing, are a shorter, temporary loan, to cover a borrower’s payment for a short period of time between two different closing dates. So, a bridge loan is secured by your existing home. We all know that realtors put their best effort in arranging closing dates to help both the buyer and the seller. However, this scenario is not always possible. When the sale of the buyers’ current house is set to close after the possession date of their new house, a bridge loan will be required to temporarily supply what would be the down payment of the new home. So, this type of temporary loan is secured by your existing home. 

The question then becomes: what is the advantage of getting a bridge loan? It is true that the buyer will have to make extra interest and fee payments for a bridge loan, but its advantage is the possibility of not losing a purchase if the possession dates cannot be met.  Besides, there is the advantage of being able to immediately put the home on the market and buy without restrictions. At the same time, the buyer has the opportunity to move into the new home at an earlier date. In some cases, bridge loans might not require monthly payments for a couple of months. Remember: a bridge loan also represents a more relaxed approach to moving into a new home. It does not need to be all done within a 24-hour period.  It is certainly less stressful and could even save you money if you are doing a bigger renovation.

Are there any disadvantages? Just the fact that this type of loan costs more than home equity loans and some buyers may not qualify to own two homes.  The fee for bridge loans varies from lender to lender. 

Keep in mind that you must have entered into a firm sale on your current home to qualify for a bridge loan and that lender will only offer it equal to the down payment required for your new home. This amount cannot be greater than the equity remaining in your current home.