I Want to Buy a New House. Do I Have to Get a Bridge Loan?

You wake up one morning and realize you’re facing a similar situation as a lot of other people — your family has expanded, but your house has stayed the same size. Kind of like in Alice in Wonderland, when Alice eats the cookie in the White Rabbit’s house and grows until she’s bursting out of it. Time to move!

But you have a problem: Without a ton of cash in the bank, you won’t have the funds to buy a new house until you sell your current one. There has to be a way out of this, right?

There is. And you’re not alone — when financing a home purchase, 53% of repeat buyers reported using funds from the sale of a primary residence to upgrade to their new home. There are a few different solutions, and one of those is a bridge loan.

A bridge loan is probably the best-known method for getting the rates and terms on the mortgage that you want without having to sell your current house first. Best of all — if you’ve found your next dream home, you don’t have to convince the seller to wait until you’ve sold your current home. But there are some drawbacks, and possibly a better option out there for you than a bridge loan. Here’s what you need to know.

How bridge loans work

Bridge loans are short-term loans secured with your existing home’s equity; you can then use the funds as a down payment for the house you’re looking to buy.

Short-term is the key here: bridge loans typically have terms between six months and a year. They are intended to be repaid as soon as you sell your current home, and they are also referred to as interim loans, gap financing, or “swing” loans.

The idea behind bridge loans is that they “bridge” the gap between when a homebuyer needs money and when they have it in the bank. You could think of these loans kind of like payday loans, only with a more forgiving interest rate.

However, because of their short-term nature and the risk factor, interest rates on bridge loans tend to be higher than mortgages. You’ll also likely have to pay an origination fee.

Typically, a bridge loan is paid off in one lump sum or “balloon payment,” either as soon as the funds from the sale of the current house are available, or at the end of the loan term. “You can tap the equity of your current home before you’ve sold it,” explains top-selling Omaha agent Don Keeton, who works with 75% more single family homes than the average agent in his area.

Here are three examples of how a bridge loan could work. (Note: These are simply hypotheticals to illustrate how the bridge loan could work and don’t take into account the interest payments and fees you would pay on an actual bridge loan.)

Example #1: Say your current home is worth $200,000, and you have $100,000 in equity. You find a home that you want to buy that costs $300,000, and you want to put down $60,000, or 20% — but you don’t have any savings, and you haven’t sold your home yet. You can take out a bridge loan for $60,000 and buy your new house. Then, when your old house sells, you can use the $100,000 you make from the sale (minus your expenses — closing costs, interest, and fees) to pay off the bridge loan. You should also have some money left over since you didn’t use the entire $100,000 to pay off the bridge.

Example #2: Your current home is worth $300,000, and you have $90,000 in equity. Your new home costs $450,000, and you want to put down 20%, or $90,000. That’s the full amount of your equity — but you really want this house. You can take out a bridge loan for the full down payment amount of $90,000. When your old house sells, you use the proceeds to pay back the $90,000 bridge loan. The only difference in this scenario is that you wouldn’t have money left over from the proceeds since you used all of your equity to buy the new house … in fact, with the interest you’ll have to pay on the bridge loan, you’ll owe money at the end of the day.

Example #3: Your current home is worth $120,000 and you have $72,000 in equity. The new home you’ve found costs $250,000. A 20% down payment is $50,000, which should be no problem with $72,000 in equity available. You take out a bridge loan for $50,000 to purchase the new house. When the old house sells, you pay off the bridge loan for $50,000 and are left with $22,000 from the equity in your old home (minus your expenses — closing costs, interest, and fees).

Starting to make sense?

“If you go to a seller and say, ‘Would you wait until I sell my house?’, in today’s market, they’ll probably say ‘No,’” says Keeton. “A bridge loan is a way for you to take control of that house so you don’t lose it to another buyer.”