Q: What is a Bridge Loan? A: A bridge loan is a short-term loan that can be helpful when you’re in-between buying a new home and selling your old one.
Q: Who would need one? A: Imagine you’ve found your new dream home but your old one hasn’t sold yet. How do you come up with the down payment for the new home? Since many homeowners are counting on the equity in their existing home to be their down payment in their new home, a bridge loan can act as your down payment until your old home sells and “bridge” the gap between your new home purchase and your old home sale.
Q: Why do a bridge loan instead of a home equity line or loan? A: Many lenders will not grant a home equity line or loan if the home is on the market. In addition, adding an additional lien on a home can cause problems with the home sale.
Q: What are the benefits? A: Bridge loans allow the borrower to put their home on the market without restrictions. In addition, the borrower can remove any contingencies to sell their home from their offer to buy their new home. Finally, many bridge loans don’t require payments for a few months, giving buyers time to hopefully sell their old home before worrying about paying off the loan.
Q: What are the drawbacks? A: Typically, interest rates and points are higher on a bridge loan than on a home equity line or loan, and there are costs and fees involved with closing a bridge loan, whereas many home equity products are free. In addition, it can be difficult to qualify for a bridge loan, since the buyer would essentially need to be qualified to own two homes.
Anyone interested in a bridge loan should compare the benefits and drawbacks for each option and determine what the best fit for their particular situation is. Talk to your financial advisor to discuss what is best for you.