Bridge

Bridge Loans

A bridge loan is often used in real estate transactions to provide cash flow during a transitional period, such as while moving from a current residence into a new home. Homeowners can use these short-term loans, which can help quickly put more cash in their pockets, to finance a new home or pay off an existing debt obligation. However, like any form of financing, bridge loans come with their own benefits and drawbacks.

A bridge loan is a form of short-term financing that can serve as a source of funding and capital until a person or company secures permanent financing or removes an existing debt obligation.

Pros

○ A bridge loan offers you the opportunity to buy a new house before you’ve sold your current home.
○ You can make an offer on a new home without having to implement a sale contingency.
○ It also provides additional funds in the event of a sudden or time-sensitive transition.
○ It presents a helpful short-term solution for financing your way through periods of uncertainty.
○ There is often the prospect of no monthly payments for the first few months, interest-only payments, or payments that are deferred until you sell.

Cons

○ Bridge loans come with higher interest rates and APR.
○ Most lenders require a homeowner to have at least 20% home equity built up before they’ll extend a bridge loan offer.
○ You may own two houses for a time – and managing two mortgages at once can be stressful.
○ Trouble selling your property can lead to future issues, or – in a worst-case scenario – even foreclosure.

Home equity loans are a popular alternative to bridge loans. Under this form of financing, which is secured using your current home as collateral, you can borrow against current equity held in your home. Home equity loans are typically long-term in nature (ranging up to 20 years) and offer interest rates that compare favorably with those attached to bridge loans.

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