A bridge loan is a type of short-term loan that “bridges” the gap between selling your existing home and putting a down payment on a new home. They can be handy if you suddenly need to move to a new home before you have the opportunity to sell your previous home.
However, bridge loans can be more expensive than other types of home loans, so it’s crucial to understand how much they cost and what’s at stake.
How does a bridge loan work?
Bridge loans are secured by using your home as collateral. This means if you can’t pay back the loan, you risk losing your home.
Unlike a mortgage, which can take 15-30 years to repay, a bridge loan needs to be paid back within six months to three years. A bridge loan is not meant to replace your mortgage.
When you might use a bridge loan
Here are some examples of when a bridge loan could come in handy:
- The market is hot, and you need to move quickly to secure your dream house
- You were offered a job located across the country. Your start date is approaching, and you need to buy a new house sooner than you can sell your current house
- The sellers of your next home won’t accept contingent offers (meaning, they won’t wait until your house has sold to finalize the transaction)
- Closing on your current house is scheduled after the closing date for your new house
How much does a bridge loan cost?
Compared to a home equity loan, bridge loans are more expensive. They typically run about two percentage points more than the average 30-year, fixed mortgage. Rates on a bridge loan may vary depending on the lender, your location, and your credit. Like a mortgage, a bridge loan comes with fees covering administration, escrow and title.
A bridge loan requires that you have 20 percent equity in your current home.
Bridge loans are special in that they don’t require you to start making payments on them until your current home sells. So, if it takes four months to sell your home, you wouldn’t need to make payments on the bridge loan for four months. However, all that waiting around time isn’t free. You’ll accrue interest and need to pay it back in a lump sum.
Example of how a bridge loan is used
Let’s pretend you took out a bridge loan on your home that’s worth $250,000. You have $150,000 left on the mortgage. You take out a bridge loan for 80 percent of your current home’s value, which is $200,000. This amount is used to pay off your current mortgage and give you an extra $50,000 for your new home’s down payment.
You should subtract fees and closing costs for the bridge loan, let’s say it’s $7,000. Then, you’d have roughly $43,000 to put towards your new home.
Disadvantages of a bridge loan
Bridge loans can be expensive — they are usually more expensive than a HELOC or home equity loan. They can also be risky because you’re banking on the fact that your home will sell quickly. Let’s not forget the added financial stress of having two homes and two mortgages, even if it’s temporary.
Bridge loans may have higher interest rates, APR, and your lender may use a variable prime rate that increases over time. There’s also the accrued interest you need to pay in a lump sum once your house sells. So, if it takes six months to sell, you’ll need to pay six months’ worth of accrued interest, in addition to closing costs and fees.
Do I qualify for a bridge loan?
You need to have excellent credit in order to qualify for a bridge loan and requirements will vary with different lenders. Generally speaking, you’ll need that 20 percent equity in your home and a low debt-to-income ratio.
If you don’t have enough equity, cash, or your credit has some negative marks, you most likely won’t qualify for a bridge loan.
2 Bridge loan alternatives
If you don’t qualify or don’t want to juggle two homes at once, there are a few alternatives to a bridge loan.
1. Personal loan
A personal loan may be easier to qualify for, and you can choose a fixed rate. Upstart’s APRs range from 8.09% – 35.99%.*
Personal loans on Upstart may offer more flexibility than a bridge loan for repayment. Repayment terms range from 3 to 5 years, which may allow you to spread out your payments over time in a way that fits your monthly budget. Unlike a bridge loan, you don’t need to use your home as collateral. Upstart has loans from $1,000 to $50,000**.
The process is simple,fast, and you can find out if you qualify in just minutes. If you qualify, you may even be able to get funded the very next day.
2. Home equity loan or HELOC
Home equity loan and HELOC (home equity line of credit) interest rates and fees may be lower than bridge loans. A home loan gives you the money upfront while a HELOC is more like a credit card — you use only what you need.
Just like a bridge loan, however, both loans require you to use your home as collateral. Also, if time is of the essence, a home equity loan may not be the best option since it typically takes anywhere from 2-4 weeks (or longer) to process.
A bridge loan may help if you need to buy a new house before you have time to sell your current one. Having to move is stressful enough. When you have to do it quickly, you may feel panicked or make hasty decisions. But bridge loans have become increasingly rare since the Great Recession. The high APRs are expensive for borrowers and balancing multiple large loans is risky.
Make sure you understand the costs involved and know exactly how much interest you’ll pay. Weigh the pros and cons carefully and figure out what makes the most sense for you, financially.
*The full range of available rates varies by state. The average 3-year loan offered across all lenders using the Upstart Platform will have an APR of 19% and 36 monthly payments of $35 per $1,000 borrowed. There is no down payment and no prepayment penalty. Average APR is calculated based on 3-year rates offered in the last 1 month. Your APR will be determined based on your credit, income, and certain other information provided in your loan application. Not all applicants will be approved.
**Your loan amount will be determined based on your credit, income, and certain other information provided in your loan application. Not all applicants will qualify for the full amount. Loans are not available in West Virginia or Iowa. The minimum loan amount in MA is $7,000. The minimum loan amount in Ohio is $6,000. The minimum loan amount in NM is $5,100. The minimum loan amount in GA is $3,100.)