Quick summary

A bridge loan is a short-term, interest-bearing loan secured by the equity in your current home that provides cash to close on a new home before the old one sells. Lenders structure bridge loans with higher rates and fees than permanent mortgages and expect repayment once the existing property is sold. For borrowers who need speed and certainty in a competitive market, a bridge loan can be a useful tool — but it increases carrying costs and timing risk. (See Consumer Financial Protection Bureau guidance: https://www.consumerfinance.gov/ask-cfpb/what-is-a-bridge-loan-en-2196/.)

How bridge loans actually work

  • Collateral and underwriting: Most bridge loans are secured by the home you already own. The lender evaluates your credit, income, and the home’s equity (often expressed as a percentage of the home’s current market value). Lenders vary, but many will let you access a large portion of the available equity — commonly in the 70–90% range depending on underwriting standards and combined loan-to-value limits.
  • Loan types: There are two common structures:
  • Closed (or simultaneous) bridge loan — repayment is expected on a known date (often tied to the sale of the existing home), and the lender may take the sale proceeds in escrow to pay off the bridge loan.
  • Open bridge loan — repayment timing is less certain; borrower pays interest until they sell and then repays principal. Open bridges carry more lender scrutiny and sometimes higher costs.
  • Interest and payments: Bridge loans generally carry higher interest rates than long-term mortgages. Some lenders require interest-only payments during the bridge period; others capitalize interest and require a balloon payment when the sale closes. Expect origination fees, appraisal fees, and closing costs similar to a mortgage.
  • Repayment: The typical timeline is 6–12 months. The intent is to repay the loan with the proceeds from the sale of your existing home. If the property doesn’t sell or sells for less than expected, the borrower is still responsible for repayment.

Example from practice

In my practice I’ve worked with buyers who used a bridge loan to win a competitive bid. One client leveraged a closed bridge secured by her existing condo; it allowed her to make a non-contingent offer and close within three weeks. She sold the condo two months later and the sale paid off the bridge loan, but she paid higher interest and a 1% origination fee. That higher cost was worth it because she avoided a bidding war and moving twice.

Who benefits most from a bridge loan?

  • Homeowners with sizable, confirmed equity and stable income.
  • Buyers in competitive markets where being non-contingent or offering faster closing increases chances of winning a purchase contract.
  • Situations where timing is tight (e.g., relocation, family needs) and temporary increased cost is acceptable.

Key risks and timing considerations

  1. Higher carrying costs: Bridge loans cost more — higher interest rates, origination fees, and closing costs can add materially to your monthly burden.
  2. Sale delays: If your current home takes longer to sell than expected, you may pay months of interest and fees. In a slow market, this can become expensive quickly.
  3. Market depreciation: If the local market softens and your existing home sells for less than projected, you may face a shortfall when repaying the bridge loan.
  4. Qualification risk: Lenders often require that you qualify for both the bridge loan and the new mortgage. If you over-lever, lenders may deny the mortgage or require higher down payments.
  5. Two-house carry: If you don’t sell quickly, you may temporarily carry payments on both properties — mortgage, insurance, taxes, utilities — plus the bridge loan.

Practical timing checklist before taking a bridge loan

  • Get a realistic market appraisal or comparative market analysis (CMA) and discuss likely sale timeline with your real estate agent.
  • Ask the lender whether the bridge is closed or open and confirm exactly how repayment is triggered.
  • Build a stress-test scenario: what happens if your sale is delayed by 3, 6, or 9 months? Can you afford interest-only payments for that period?
  • Confirm total upfront and monthly costs (origination fees, appraisal, title, ongoing interest).
  • Consider agreeing to a sale contingency with a flexible closing date if that reduces cost and risk.

Alternatives to consider (and when they may be better)

  • HELOC (home equity line of credit): A HELOC can provide flexible access to equity and often lower up-front costs. It can make sense if you expect to draw only when needed and want a reusable line. 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/).
  • Home equity loan or cash-out refinance: These convert equity into a fixed-rate loan; better when you want long-term financing rather than a short-term bridge.
  • Contingent offer or rent-back agreements: In some markets an offer contingent on the sale of the buyer’s home or a negotiated rent-back from the seller can remove the need for bridge financing.
  • Personal savings or bridge from family: If feasible, using savings or temporary family loans avoids high bridge costs.
    For a broader look at home equity options see: Using Home Equity Lines (HELOC) Responsibly: Risks and Rewards (https://finhelp.io/glossary/using-home-equity-lines-heloc-responsibly-risks-and-rewards/).

How lenders evaluate bridge loan applications

Lenders consider:

  • Equity available in the current home and combined loan-to-value (CLTV) if you’re keeping the old mortgage.
  • Your credit score, debt-to-income ratio, and employment/income documentation.
  • The local market: lenders prefer areas where homes move quickly.
    Some lenders also require a signed contract with the buyer of your existing home or an active listing and proof of marketing efforts.

Tax and legal notes

Bridge loans are not income and therefore not taxable proceeds; they are debt. Interest deductibility depends on how the funds are used and whether the loan meets IRS rules for home acquisition debt. Mortgage interest deduction rules are complex and changed under recent law; consult a tax professional or IRS guidance before assuming interest will be deductible.

Common mistakes to avoid

  • Assuming the sale will be fast — always plan for delays.
  • Forgetting to include bridge loan fees in your affordability calculation.
  • Over-leveraging — borrowing to the maximum of your equity without a contingency plan.
  • Not reading the repayment triggers: some bridges require immediate payoff on any default or refinance.

Practical negotiation tips

  • Ask sellers for a short rent-back if closing on the new home before selling the old — this can reduce the need for urgent sale timing.
  • Negotiate fee caps and interest-only options with lenders.
  • Consider a backup plan with a HELOC or personal line of credit if the sale stalls.

Final recommendation

A bridge loan can be the right tactical tool when timing matters and you have clear evidence your current home will sell within months. In my experience, the borrowers who benefit most are those who (a) have confirmed equity, (b) can cover holding costs for a worst-case delay, and (c) use the bridge as a short, controlled bridge to permanent financing. For every borrower I’ve guided into a bridge, we built a conservative stress test showing the worst-case cost and an exit plan.

Sources and further reading

Professional disclaimer: This article is educational and not individualized financial or tax advice. Discuss bridge loans with a qualified mortgage professional and a tax advisor who can evaluate your specific financial situation.