What Are Bridge Loans and How Do They Benefit Homebuyers?
Bridge loans are short-term loans designed to “bridge” the timing gap between buying a new home and selling your current one. Lenders typically secure the loan with the borrower’s existing property (and sometimes the new property), allowing rapid access to funds for a down payment or to close a purchase. In competitive markets, a bridge loan can let you make a strong offer without contingent sale language, increasing the likelihood of winning the contract.
In my work advising buyers in fast-moving markets, I’ve seen bridge loans give clients a decisive edge when sellers prefer non-contingent offers. However, that advantage comes with higher interest rates, origination fees, and a compressed timeline that can increase financial stress if the old home doesn’t sell promptly.
Sources: Consumer Financial Protection Bureau (CFPB) guidance on short-term mortgage alternatives and lender disclosures; Investopedia primer on bridge loans.
How bridge loans work (step-by-step)
- Application and eligibility: Lenders review income, credit, and—critically—equity in your current home. Typical approvals require significant equity and a solid debt-to-income profile.
- Loan structure: Most bridge loans are interest-only during the term. The principal is paid off when you sell your existing home or refinance into a long-term mortgage.
- Collateral and lien position: The bridge loan is secured by your current home. Some lenders take a first lien; others use a second lien alongside your primary mortgage. Understand lien priority—if the bridge lender holds the first lien, it can complicate later closings.
- Repayment: Repayment usually occurs when the existing property sells. If it doesn’t sell in time, you must either extend, refinance, or pay off the loan from other funds.
Practical note: Turnaround between application and funding is often faster than a conventional mortgage—days to a few weeks—because lenders price these as short-term, higher-risk products.
Types of bridge loans and typical terms
- Open bridge loan: No fixed repayment date; borrower may pay when they sell. Lenders may charge higher rates and stricter terms.
- Closed bridge loan: Has a set repayment date (6–12 months is common). If the house hasn’t sold, you face extension fees or refinancing.
- Cross-collateralized bridge loan: Uses both the existing and new property as collateral. This can increase the lender’s security but adds complexity.
Typical features:
- Loan term: 6–12 months (some lenders offer up to 24 months but expect higher fees).
- Interest: Higher than conventional mortgages; often interest-only payments.
- Fees: Origination, appraisal, title, and closing costs are common. Expect to pay similar closing costs to a mortgage, plus lender-specific fees.
Costs, an example, and effective APR
Costs vary by lender and market. Here’s a simplified example to illustrate:
- Bridge loan principal: $100,000
- Interest rate (annual): 8% (interest-only)
- Term: 6 months
- Interest cost for term: $100,000 * 8% * 0.5 = $4,000
- Fees (origination + closing): $2,500 (varies)
- Total short-term cost: ~$6,500
While the monthly payments may be interest-only and relatively small, the effective annualized cost can be high when fees and the short term are factored in. Always compare the loan’s APR and total cash required to alternatives.
Eligibility and underwriting considerations
Lenders look for:
- Significant equity in your existing home (often 20%+). Equity reduces lender risk.
- Income and reserves that show you can carry both loans if needed.
- Credit score: Many lenders prefer scores 700+ but requirements vary.
- Clear exit strategy: A sale contract, market comps, or a planned refinance.
If you don’t meet these, lenders may require higher rates, larger down payments, or reject the application.
Risks and potential pitfalls
- Higher borrowing costs: Bridge loans have elevated interest rates and fees compared with conventional mortgages.
- Double payments: If your current home doesn’t sell quickly, you may carry two housing payments—your new mortgage plus bridge loan costs.
- Sales delay or price drop: A slower market or a lower-than-expected sale price can force an extension or refinancing under worse terms.
- Lien complications: Some bridge loans take the first lien position; that can delay or prevent closing on the new home until existing obligations are cleared.
- Liquidity risk: If you rely solely on the bridge repayment from a sale, you may be forced into hurried negotiations or price concessions.
In practice, I’ve advised clients to budget conservatively and build a cushion (3–6 months of housing costs) before taking a bridge loan.
Alternatives to bridge loans
Before taking a bridge loan, consider other strategies:
- Home Equity Line of Credit (HELOC) or home equity loan: Often cheaper and may offer longer terms. See our guide to home equity options for differences and tax implications.
- Contingent offer (sale contingency): Makes your home sale a condition of purchase. This weakens the offer in competitive markets.
- Rent-back / leaseback agreement: Sell first, then rent your old home from the buyer for a short period to buy time.
- Bridge financing from a primary lender: Some mortgage lenders offer specific bridge products or allow you to roll the loan into your new mortgage.
- Sell first (if feasible): Reduces financing cost and complexity.
Compare costs, speed, and risk. For many clients, a HELOC or timed sale is a less expensive and lower-risk solution than a bridge loan.
How to mitigate risk when using a bridge loan
- Get a written exit plan: Have a realistic sales timeline and fallback options (HELOC or refinance).
- Negotiate lien and repayment terms: Ask whether the lender will accept a second position or cross-collateralization, and what extension options cost.
- Shop lenders: Rates and fees vary widely. Compare total cost, not just advertised rates.
- Use conservative pricing when projecting your sale proceeds: Assume a longer marketing time and potential price concessions.
- Maintain liquidity: Keep emergency savings to avoid distress if the sale stalls.
Tax and accounting considerations
Tax treatment of bridge loan interest can be complex. Interest may be deductible if it meets the IRS rules for acquisition indebtedness or home-equity interest, but the specific facts and timing matter. Consult a tax advisor to confirm whether your bridge loan interest is deductible.
Authoritative resources: Consumer Financial Protection Bureau (https://www.consumerfinance.gov/) and lender disclosures. For tax specifics, consult IRS Publication 936 and a qualified tax professional.
Checklist before signing a bridge loan
- Confirm loan term, interest rate, and full fee schedule in writing.
- Verify lien position and how it affects closing on the new purchase.
- Obtain a realistic sales timeline from your agent and compare to the loan term.
- Evaluate alternative financing (HELOC, sale contingency, sell-first).
- Confirm tax treatment with your accountant.
- Ensure you have 3–6 months of cash reserves beyond loan costs.
Frequently asked questions (brief)
Q: What happens if my house doesn’t sell in time?
A: You may need to extend the bridge loan (with fees), refinance into another product, use other funds to pay it off, or negotiate a price reduction or different exit strategy.
Q: Can I convert a bridge loan into a mortgage?
A: Some lenders allow conversion or refinancing, but terms vary. Plan early to avoid last-minute rate or underwriting surprises.
Q: Are bridge loan interest payments deductible?
A: Possibly, depending on how funds are used and IRS rules. Check with a tax professional.
Final thoughts and professional perspective
Bridge loans are a useful tactical tool when timing matters and you have a credible sales plan and sufficient equity. In my experience, they work best when used by borrowers with clear exit strategies, conservative budgeting, and professional support from a mortgage broker, real estate agent, and tax advisor. When used without a plan, bridge loans can convert a competitive advantage into a financial strain.
For foundational background on mortgages and how bridge financing interacts with long-term home loans, see our overview of mortgages and the differences among home equity products in our home equity guide.
Professional disclaimer: This article is educational only and does not constitute financial, legal, or tax advice. Consult qualified professionals for guidance tailored to your situation.
Authoritative sources and further reading: Consumer Financial Protection Bureau — short-term mortgage and consumer guidance (https://www.consumerfinance.gov/), Investopedia — Bridge loan overview (https://www.investopedia.com/terms/b/bridgeloan.asp).