Homeowners who need to buy their next home before selling their current home may find the bridge loan to be useful.
Also known as "swing loans," bridge loans are a type of short-term financing used when you want to buy a new house, but you haven’t yet closed on the sale of your old house. Your current home serves as the collateral for the bridge loan. You pay off the bridge loan with the proceeds from the sale of your old home after it closes.
Bridge loans typically last between 90 days to one year. During the term of the loan, you typically make interest-only payments to be sure that the lender is compensated for providing this vital service within a short loan period.
The amount you can qualify to borrow is determined by the amount of equity you have in your old home. You can either borrow enough money to pay off your existing mortgage and make the down payment on your new home or you can continue to make your monthly mortgage payments, and only borrow enough to cover the down payment on your new house.
If you haven't sold your current home by the time the bridge loan expires, you would have to refinance the loan into a standard mortgage with fixed monthly payments to cover both principal and interest.
For this reason, you should use a bridge loan only if you already have a contract to sell your existing house, and you're just waiting to close.
Bridge loans can be more expensive than other types of mortgages, such as true home equity loans. They are a type of gap insurance, and usually come with higher interest. Many banks charges rates that are up to two percentage points higher than conventional mortgages. They may also require a borrower to pay points as a loan origination fee.
Bridge loans can be a good option for financing a short period of time between closing on your new home and closing on your old home.