How do bridge loans work when buying a new property before you sell?

Bridge loans are short-term loans meant to “bridge” the time between buying a new home and selling an existing one. Lenders use the equity in your current property as collateral and advance cash you can use for a down payment, earnest money, or closing costs on the new purchase. In my practice working with homebuyers and small investors, I see bridge loans most often when market timing or a competitive offer requires immediate funds.

This article explains how bridge loans operate, who they suit, typical costs and terms, exit strategies, common mistakes, and practical alternatives you should consider. It also links to related FinHelp guides so you can dig deeper into specific scenarios.

How a bridge loan is structured (step-by-step)

  1. Application and appraisal: You submit documentation (income, credit, and title) and lenders usually appraise the property used as collateral.
  2. Advance and use of funds: The lender provides a lump sum—often sized to a percentage of your home equity—that you use toward the new purchase.
  3. Interest and payments during the term: Many bridge loans are interest-only during the term, with interest payable monthly, or the loan may defer payments until maturity.
  4. Exit: The loan is repaid when you sell the existing property, when you refinance both properties into a mortgage, or at the loan term’s end. Some lenders require a fixed exit plan and proof you’ve listed the property for sale.

Who typically uses bridge loans?

  • Homebuyers who must purchase quickly before their current home sells.
  • Buyers making non-contingent offers in competitive markets.
  • Real estate investors and developers needing quick capital for acquisitions or to secure deals.
  • Homeowners with substantial equity who prefer avoiding contingent offers.

Lenders look for reasonable equity in the collateral property, a stable income record, and a credible, time-bound plan to sell or refinance. A strong credit score and documented exit strategy improve terms.

Typical costs, terms and what to watch for

  • Loan duration: Usually 6 months to 3 years. Lenders expect a clear exit within that window.
  • Loan amount: Often a percentage of available equity; common loan-to-value (LTV) formulas may fund 50–80% of the current home’s equity value, but practices vary by lender and borrower risk.
  • Interest rates: Bridge loans typically carry higher rates than first mortgages—often several percentage points above market mortgage rates—because they are short-term and riskier for lenders.
  • Fees: Expect origination fees, appraisal and closing costs, and possible exit or prepayment penalties.
  • Payment structure: Interest-only monthly payments are common, but some lenders accrue interest until the loan is repaid.

Table: Common bridge loan terms

Term Typical range or note
Duration 6 months – 3 years
Loan sizing Based on home equity; often 50–80% of equity (varies by lender)
Interest rates Higher than conventional mortgages; several points above prevailing mortgage rates
Payments Interest-only or deferred until payoff
Fees Origination, appraisal, closing; possible exit penalties

Sources: Consumer Financial Protection Bureau (CFPB) guidance on short-term mortgage products and consumer protections, and lender industry analysis (see CFPB: https://www.consumerfinance.gov and Investopedia: https://www.investopedia.com/terms/b/bridgeloan.asp).

Pros and cons — short summary

Pros:

  • Speed: Move quickly to secure a property without waiting for your current home to sell.
  • Competitive offers: Allows you to make non-contingent offers in fast markets.
  • Flexibility: Lenders can tailor terms to your timeline and exit strategy.

Cons:

  • Cost: Higher interest rates and fees raise the overall cost of financing.
  • Repayment pressure: You must sell or refinance within the term or face higher costs.
  • Complexity: Lenders may impose strict conditions and require proof of listing or active marketing.

Exit strategies and risk management

An exit strategy is the single most important factor when evaluating a bridge loan. Common exit paths include:

  • Selling the current home and using proceeds to pay off the bridge loan.
  • Refinancing into a conventional mortgage or combining mortgages (cash-out refinance) that covers both properties.
  • Rolling the loan into a longer-term construction or renovation loan if the bridge was used for a rehab project.

Practical steps I recommend to clients before signing:

  • Get a conservative timeline from your real estate agent for sale expectations.
  • Model monthly interest costs and worst-case scenarios (what if the sale takes 3–6 months longer?).
  • Confirm any prepayment penalties and whether the lender requires sale proceeds to flow directly to payoff.
  • Have contingency funds to cover extra months of interest if the market slows.

Common mistakes I see (and how to avoid them)

  • Underestimating carrying costs: Calculate ongoing mortgage, bridge interest, taxes, insurance, and HOA dues together.
  • Lacking a realistic sale plan: Don’t assume a quick sale—price competitively and stage/list aggressively.
  • Choosing the wrong product: A HELOC or personal bridge from a local bank can be cheaper in some cases (see Alternatives below).

Alternatives to bridge loans

  • Home equity line of credit (HELOC): A revolving line secured by your home; can be cheaper but appraisal and underwriting still apply. See our comparison: Bridge Loans vs HELOCs: Best Uses for Short-Term Home Financing (FinHelp) — https://finhelp.io/glossary/bridge-loans-vs-helocs-best-uses-for-short-term-home-financing/
  • Contingent offer or rent-back agreements: Offer to buy contingent on sale, or negotiate a lease-back if buyer needs time.
  • Cash reserves or temporary personal loans: If you have liquid reserves or a short-term margin loan, these can avoid higher bridge costs.
  • Seller financing or delayed closings: In some deals, sellers accept delayed possession or creative terms.

For broader context on timing and when bridge loans make sense, review our FinHelp guide Bridge Loan Basics for Buying Before You Sell — https://finhelp.io/glossary/bridge-loan-basics-for-buying-before-you-sell/

Real-world examples (anonymized)

Case 1 — Competitive purchase: A client with 60% equity used a 12-month bridge to submit an all-cash offer that beat other contingent bids. She paid interest monthly and sold her home in 8 weeks, repaying the bridge and avoiding a higher final mortgage rate.

Case 2 — Carry risk: Another client took a bridge with a tight timeline; an unexpected appraisal dispute delayed his sale by two months, doubling interest costs and stressing cash flow. We remodeled the exit strategy and refinanced into a longer-term loan to stabilize costs.

These examples highlight the tradeoff: speed and competitive positioning versus cost and repayment risk.

Tax and legal notes

Interest on bridge loans may be treated differently depending on how the funds are used and whether the loan is secured by a qualified residence. Mortgage interest deductibility rules have changed in recent years; consult the IRS guidance on mortgage interest and a tax advisor for your specific situation (IRS: https://www.irs.gov). This article does not provide tax or legal advice.

How I evaluate a bridge loan request in my practice

When clients ask whether to use a bridge loan, I review:

  • Confirmed equity and likely net proceeds from a sale.
  • Local market days-on-market expectations from their agent.
  • Cash flow sensitivity—how many extra months of interest can they afford?
  • Alternatives that may produce similar flexibility at lower cost.

If the numbers and timeline are reasonable and the client understands the costs and exit requirements, a bridge loan can be an effective tool to secure a desired property.

Final checklist before signing

  • Verify all fees and the exact interest rate and payment schedule.
  • Confirm lender requirements on sales proceeds and documentation.
  • Get a written exit plan and timeline tied to your selling strategy.
  • Compare alternatives (HELOC, contingent offers, refinancing options).
  • Consult a tax advisor about interest deductibility if you plan to itemize deductions.

Disclaimer

This article is educational and based on professional experience and industry sources, including the Consumer Financial Protection Bureau (consumerfinance.gov) and Investopedia. It is not personal financial, tax, or legal advice. For decisions about bridge loans, consult a licensed mortgage professional, tax advisor, or attorney who can assess your specific circumstances.

Further reading and related FinHelp guides:

Author credentials: CPA and CFP® with 15+ years advising homeowners and investors on mortgage strategy and short-term financing.