How a bridge loan actually works

A bridge loan gives you short-term cash (commonly 6 months to 3 years) so you can close on a new home before your current one sells. Lenders usually base the loan amount on the equity in your existing home—often a percentage of current market value minus any outstanding mortgage balance. Payments are frequently interest-only during the bridge term, with the principal due when your old home sells or when you convert the bridge to a permanent loan.

Key structural points:

  • Collateral: Most bridge loans are secured by your current home; some are secured by both the old and new property.
  • Payment type: Interest-only payments are common, though terms vary by lender.
  • Term length: Short — commonly 6–24 months, occasionally up to 3 years.
  • Recourse: Some bridge loans are recourse (borrower liable), others non-recourse (collateral only). Know which you’re signing.

(For practical differences between bridge loans and home equity options, see our comparison: Bridge Loans vs HELOCs: Best Uses for Short-Term Home Financing: https://finhelp.io/glossary/bridge-loans-vs-helocs-best-uses-for-short-term-home-financing/.)

Typical costs and fees to expect

Bridge loans cost more than standard mortgages. Expect:

  • Interest rates higher than conventional mortgages — often 1–4 percentage points above current mortgage rates depending on credit and market.
  • Origination fees and closing costs similar to other mortgage products (appraisal, title, recording fees).
  • Possible points or lender fees: lenders may charge points up front for a lower rate.
  • Carry costs: insurance, taxes, property maintenance if you’re holding both homes.

Because rates and fees vary, get a written Good Faith Estimate and compare total cost of borrowing for the expected duration.

Who typically qualifies

Eligibility varies by lender but commonly includes:

  • Sufficient equity in your current home (many lenders want 20%–30% equity).
  • Credit score: many lenders prefer 620+; some require 700+ for best terms.
  • Stable income and acceptable debt-to-income (DTI) ratios.
  • A realistic sale plan for your current home (listing status, comps, and a timeline).

Lenders underwrite bridge loans more like mortgages than personal loans, so documentation (pay stubs, tax returns, proof of listing) is usually required.

Real-world example — short, concrete scenario

Jane owns a home worth $450,000 with an outstanding mortgage of $150,000. She puts her home on the market but finds a new house she must buy quickly. A lender offers her a bridge loan for $90,000 (roughly 20% of current home value after subtracting liens). Jane uses that $90,000 for the down payment on the new home, makes interest-only payments for six months while her old home is listed, and then pays off the bridge loan with proceeds when the old home sells.

This example illustrates advantages (speed, competitive offers) and the risk: if Jane’s home doesn’t sell quickly, she carries higher interest and potentially two sets of housing costs.

Exit strategies — plan before you borrow

A credible exit strategy is essential. Common options:

  1. Sell the existing home and use proceeds to pay the bridge loan.
  2. Refinance the bridge loan into a conventional mortgage on the new property (if allowed by your bridge terms).
  3. Use a HELOC or home equity loan on the new property to pay off the bridge if market conditions change.
  4. If timelines slip, work with the lender to extend or modify terms — but expect higher costs.

Always ask lenders: what happens if my old home doesn’t sell within the term? Understand penalties, extension fees, and whether the loan accelerates.

Alternatives to consider (compare costs and risks)

  • HELOC: Revolving credit secured by home equity; often cheaper but requires lender approval and may not close fast enough. See related article: HELOC vs Home Equity Loan: Which Fits Your Project? https://finhelp.io/glossary/heloc-vs-home-equity-loan-which-fits-your-project/
  • Home equity loan: Lump-sum second mortgage; steadier payments but slower to close.
  • Cash-out refinance: Replaces your mortgage and frees cash, but you may lose low rate on current mortgage and timing can be slower.
  • Contingent offers or rent-back agreements: Offer to buy contingent on sale, or arrange a short-term rent-back with the buyer of your old home.
  • Personal loan or bridge from a private investor: Usually much more expensive—use only as last resort.

Evaluate how fast each option funds, total costs for the expected holding period, and contingency plans if the sale takes longer.

How to shop lenders and compare offers

Steps that help secure favorable bridge terms:

  1. Get multiple written estimates: compare APR, fees, prepayment terms, and extension penalties.
  2. Ask for examples of total cost for different sale timelines (30, 90, 180 days).
  3. Verify whether the bridge can be converted to permanent financing and any conversion costs.
  4. Clarify recourse status and whether the loan is cross-collateralized with the new property.
  5. Read the fine print about default remedies and late fees.

Working with a mortgage broker can speed comparisons but also ask about broker fees.

Common mistakes and how to avoid them

  • Not having a written exit plan: Without a clear plan you can be stuck paying high interest.
  • Underestimating carrying costs: account for interest, insurance, property taxes, utilities, and maintenance while holding two homes.
  • Assuming all bridge loans are identical: terms, recourse, and rates vary widely — shop around.
  • Failing to check for prepayment penalties or automatic conversions that might raise costs.

Lender questions checklist (what to ask before signing)

  • What is the interest rate and APR for the expected term?
  • Are payments interest-only or principal-plus-interest?
  • What fees and closing costs will I pay up front?
  • Is the bridge loan recourse or non-recourse?
  • Can the bridge be converted to permanent financing or refinanced with the same lender?
  • What happens if my current home doesn’t sell on time? Can I extend the term?

Bring this checklist to appointments so you can compare apples-to-apples.

Tax and legal notes

Interest on a bridge loan may be deductible as mortgage interest if the loan is secured by a qualified home and used to buy, build, or substantially improve the new home, subject to the mortgage interest deduction limits and rules (see IRS guidance on mortgage interest deduction: https://www.irs.gov/credits-deductions/individuals/mortgage-interest-deduction). Tax rules change and individual situations differ, so consult a tax advisor before assuming deductibility.

Also, check state-specific rules about mortgage recording and foreclosure remedies. If you have complex title or lien issues, talk to a real estate attorney.

(Consumer protections and mortgage-shopping resources are available from the Consumer Financial Protection Bureau: https://www.consumerfinance.gov/consumer-tools/mortgages/.)

When a bridge loan makes sense — and when it doesn’t

Good fit:

  • You have significant equity and good credit.
  • Your current home is already listed with a realistic price and buyer interest.
  • You need speed to compete in a hot market.

Poor fit:

  • You have limited equity or a high DTI.
  • Your market is slow and your current home may take months to sell.
  • You cannot comfortably afford carrying two homes for an extended period.

Frequently asked questions

Q: Will a bridge loan affect my mortgage approval for the new home?
A: Lenders underwrite your full debt load; a bridge loan increases total debt until repaid. Some lenders overlap bridge and permanent loan underwriting, so disclose the bridge loan when applying.

Q: How much can I borrow with a bridge loan?
A: Amounts vary by lender; many limit combined loan-to-value (CLTV) across properties to 80%–90% of the current home’s value after liens.

Q: What if housing prices fall before I sell?
A: A price decline can reduce sale proceeds and complicate payoff. Factor a buffer into your planning; consider delaying purchase or choosing safer financing if price risk is high.

Final checklist before you sign

  • Confirm exit strategy and realistic sale timeline.
  • Get multiple firm loan estimates and compare APRs and fees.
  • Understand recourse status and collateral details.
  • Confirm potential tax treatment with your tax advisor.
  • Build a financial buffer for carrying costs.

Sources and further reading

Professional disclaimer: This article provides general information about bridge loans and alternatives. It is not personalized financial, legal, or tax advice. For guidance tailored to your situation, consult a mortgage professional, tax advisor, or real estate attorney.