A bridge loan gives homeowners the freedom to close on another home even if they don’t yet have down payment funds from the sale of their current home. A bridge loan may help your buyer fund their next home before completing the sale of their current home. Essentially, it’s a way to take out a loan against their current home to make the down payment. This temporary loan can help some buyers waive a contingency for the sale of a home – a way to help their offer stand out more to the seller, notably ones juggling many offers in a bidding war that are more likely to bypass offers contingent on the sale of a current house.
Bridge loans differ in structure among lenders. Usually, a homeowner can use a portion of their bridge loan to pay off their current mortgage while using the rest as a down payment on a new home.
Homeowners also may be able to use a bridge loan as a second mortgage. The underwriting on bridge loans tends to be faster than traditional loans, financial experts say.
While bridge loans offer buyers a chance to make a contingency-free offer on a new home without selling their existing home, there are some caveats to consider. A bridge loan tends to have higher interest rates (HousingWire reports between 8.5% to 10.5%), and these loans only last six months to a year.
Probably another important detail: Borrowers must pay back the bridge loan on time – even if their original home doesn’t sell.
