Bridge Loans: Costs, Risks, and When They Make Sense

A bridge loan is a short-term loan that helps a homeowner or investor acquire a new property before selling an existing one. It bridges the gap between two transactions, providing the capital needed to close on the new purchase while the old property is still on the market. Coventry Enterprises of America explains the mechanics and risks.

How Bridge Loans Are Structured

Bridge loans are secured by the borrower's existing property, which serves as collateral. They are typically structured as short-term loans with terms of 6 to 12 months. Some bridge lenders offer up to 24 months. The loan amount is usually up to 80 percent of the combined value of the existing and new properties.

Interest rates are significantly higher than conventional mortgage rates, typically 2 to 4 percent above comparable 30-year fixed rates. Most bridge loans are interest-only during the term, with the full principal due when the existing property sells.

Two-Loan Risk

During the bridge period, you may be carrying two mortgage payments simultaneously: the existing mortgage on the departing property and the new mortgage on the purchased property. If the old property does not sell quickly, this double payment obligation can strain cash flow severely. Run the numbers for several scenarios: what if the old property takes 3 months to sell? 6 months? 12 months? Make sure your reserves can cover the worst realistic scenario.

Alternatives to Bridge Loans

A home equity line of credit (HELOC) on the existing property can serve a similar purpose at a lower cost if you have sufficient equity and time to secure the line before you are under contract. Some buyers make the purchase contingent on the sale of the existing home, eliminating the bridge loan need entirely, though in competitive markets sellers may not accept sale contingencies.

Another option is to negotiate a longer closing period on the new purchase that gives you time to sell the existing property first. This works when the seller is flexible on timing, which is worth asking about directly.