A bridge loan is a short-term loan that helps you buy a new home before selling your current one. Here is how it works, what it costs, and when it makes sense.
What Is a Bridge Loan?
A bridge loan (also called a swing loan or gap financing) is a short-term loan — typically 6–12 months — that allows you to purchase a new home using your current home's equity as collateral before that home is sold. It "bridges" the gap between buying and selling.
How Bridge Loans Work
Your lender calculates the available equity in your current home and lends you a portion of it (typically up to 80% of the combined value of both properties). You use those funds as a down payment on the new home. When your old home sells, the proceeds pay off the bridge loan.
Example: Current home value $500,000 with $200,000 mortgage = $300,000 equity. Bridge loan up to $200,000–240,000 (80% of equity). That gives you a substantial down payment on the new home without needing to sell first.
Bridge Loan Costs
- Interest rate: Prime + 1.5–3%, typically 9–12% in current market
- Origination fee: 1–3% of loan amount
- Appraisals: Both properties typically appraised
- Term: 6–12 months maximum
Bridge Loan Alternatives
- HELOC on current home: If you have a HELOC, draw on it for the down payment. Lower cost than a bridge loan if you have one available.
- Contingent offer: Make your new home purchase contingent on selling your current home. Less risky, but sellers may not accept in competitive markets.
- 80-10-10 piggyback: Take a smaller first mortgage, a 10% HELOC, and 10% down to avoid PMI without a bridge loan.
Frequently Asked Questions
Bridge loans make sense when you've found your perfect home and need to move quickly but don't want to sell first and become temporarily homeless. They also make sense in competitive markets where contingent offers aren't accepted. The high cost (9–12% rate) is justified if it's the only way to secure a specific property you want, and you're confident your current home will sell quickly.
The main risk: your current home doesn't sell as quickly or for as much as expected. You'd then be carrying two mortgage payments plus the bridge loan — potentially for months. Also, bridge loans are expensive (9–12% rate). Before taking one, ensure you have a realistic exit strategy: either a buyer lined up, a contingent sale with backup plans, or substantial reserves to carry costs during a longer-than-expected sale period.