Timing a home sale and a home purchase so they close on the same day is difficult. In competitive markets, sellers often prefer offers that are not contingent on the buyer selling another home first, and buyers rarely want to move twice. A bridge loan is one way to close that timing gap. It provides short-term financing, secured by your current home, so you can buy the next home before the old one sells. This guide explains how bridge loans work, what they cost, and when another option may serve you better.
What a bridge loan is
A bridge loan is a short-term loan, usually lasting six months to a year, that uses the equity in your current home to help fund the purchase of a new one. Once the old home sells, the sale proceeds repay the bridge loan. Bridge loans are sometimes called swing loans or gap financing.
They are generally offered by banks, credit unions, and some mortgage lenders, often to borrowers who are also getting the new home’s mortgage from the same institution. They are a niche product, so not every lender offers them.
How bridge loans are structured
There are two common structures.
Payoff structure
The bridge loan pays off the existing mortgage on your current home and provides additional cash for the down payment on the new home. You then have one bridge loan on the old house and a new mortgage on the new house.
Second-lien structure
The bridge loan sits behind your existing mortgage as a second lien. You keep paying your current mortgage, and the bridge loan supplies cash for the new down payment. This can work when your current mortgage has a low rate you do not want to disturb before the sale.
Payment terms
Many bridge loans require interest-only monthly payments, while others defer interest until the loan is repaid at the sale. The full principal is due as a balloon when the old house sells or the term ends.
Typical terms and costs
Terms vary by lender, but common features include:
- Loan-to-value limits. Lenders often cap the combined loans on the current home at around 80% of its value.
- Higher interest rates than a standard 30-year mortgage, reflecting the short term and higher risk.
- Origination fees and closing costs, which may include an appraisal, title work, and administrative fees.
- Short terms, frequently six to twelve months, sometimes with an extension option.
Example
Suppose your current home is worth $500,000 and you owe $200,000. At an 80% combined loan-to-value limit, the maximum total borrowing against the home is $400,000. A second-lien bridge loan could provide up to $200,000, minus fees. If you use $150,000 as a down payment on a new home and the old house sells four months later, the sale proceeds repay the existing mortgage and the bridge loan, plus accrued interest.
Qualifying for a bridge loan
Lenders want confidence that you can carry two homes for a while and that the old home will sell. They typically review:
- Equity in the current home.
- Credit score, with stronger scores getting better terms.
- Debt-to-income ratio that includes both housing payments, the existing and the new.
- Marketability of the current home, sometimes requiring that it already be listed or under contract.
Some lenders will exclude the old mortgage payment from your debt-to-income ratio if the home is under contract to sell. Rules differ, so ask early.
Benefits
- Stronger offers. You can make a non-contingent offer, which sellers generally view as more attractive.
- One move. You can move directly into the new home without temporary housing.
- Time to sell well. You can prepare and stage your old home after moving out.
Risks and drawbacks
- Carrying two homes. If your old home takes longer to sell, you may pay two mortgages, property taxes, insurance, and utilities.
- Balloon repayment. If the term ends before the sale, you must repay, refinance, or extend, possibly at added cost.
- Price risk. If you must cut the price to sell quickly, your net proceeds may be lower than planned.
- Costs add up. Fees on a short-term loan can be large relative to the time you use it.
Before borrowing, estimate a worst-case scenario: what would it cost if the home took twice as long to sell, and could you afford that?
Alternatives to a bridge loan
| Option | How it works | Main trade-off |
|---|---|---|
| HELOC on current home | Draw on a line of credit for the down payment | Must open before listing; many lenders won’t open a HELOC on a listed home |
| Home-sale contingency | Offer depends on your home selling | Less attractive to sellers |
| Cash-out from investments | Use savings or securities | Market and tax consequences |
| 401(k) loan | Borrow from your retirement plan | Repayment rules if you leave your job |
| Buy-before-you-sell programs | A company provides cash or a backup offer | Program fees can be high |
| Rent-back agreement | Sell first and rent back from buyer briefly | Must coordinate timing |
HELOC vs bridge loan
A home equity line of credit often has lower closing costs and lets you borrow only what you need. However, lenders generally require that the home not be listed for sale when the line is opened, so planning ahead matters. A bridge loan is designed specifically for the transition and can be arranged when the house is already on the market.
Selling first
Selling first and renting temporarily, or negotiating a rent-back, avoids carrying two homes. The trade-off is a possible second move and the pressure of finding a home within a set timeframe.
Steps to get a bridge loan
- Ask your mortgage lender whether it offers bridge loans and on what terms.
- Get a realistic estimate of your current home’s value from a real estate agent.
- Calculate your equity and the amount you need for the new down payment and closing costs.
- Compare total costs, including fees and interest for several possible holding periods.
- Prepare a backup plan if the home does not sell within the loan term.
- Coordinate closing dates with your agent so the bridge funds are available when needed.
Questions to ask lenders
- What is the maximum combined loan-to-value?
- Are payments interest-only, deferred, or amortizing?
- What is the term, and is an extension available?
- Is there a prepayment penalty?
- What fees apply, and what will the total cost be if I repay in three, six, or nine months?
- Will my old mortgage payment count in my debt-to-income ratio?
Frequently Asked Questions
How does a bridge loan work?
A bridge loan uses equity in your current home to fund the down payment on a new home. When the old home sells, the proceeds repay the bridge loan. Terms commonly run six to twelve months.
Are bridge loan rates higher than mortgage rates?
Generally yes. Bridge loans carry higher rates and fees than standard mortgages because they are short-term and riskier for lenders.
What happens if my house does not sell before the bridge loan is due?
You may need to repay from other funds, refinance, or negotiate an extension. Plan for carrying costs in case the sale takes longer than expected.
Is a HELOC better than a bridge loan?
A HELOC can be cheaper but usually must be opened before your home is listed. A bridge loan is designed for the transition period and can often be obtained while the house is on the market.
How much can I borrow with a bridge loan?
Many lenders limit total loans on your current home to around 80% of its value. The bridge amount is the difference between that cap and your existing mortgage, minus fees.
This article is for general informational purposes only and is not legal, medical, tax, or financial advice. Rules vary by state and change over time; confirm details with the relevant agency or a licensed professional.
