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Erik J. Martin
Erik J. Martin is a Chicago area-based freelance writer/editor whose articles have been featured in AARP The Magazine, Reader's Digest, The Costco Connection, The Motley Fool and other publications. He often writes on topics related to real estate, business, technology, health care, insurance and entertainment.
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Kenneth Chavis IV is a senior wealth counselor at Versant Capital Management who provides investment management, complex wealth strategy, financial planning and tax advice to business owners, executives, medical doctors, and more.
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If you’re moving between homes — especially with little notice — a short-term bridge loan can help cover costs, but it also carries some risks.
A bridge loan — also referred to as a gap loan, hard money loan or swing loan — is a short-term loan that typically helps with financing when moving from one house to another. Bridge loans are often secured by your current home as collateral, but some allow for other types of assets.
Homeowners faced with sudden transitions, such as having to relocate for work, might prefer a bridge loan to help with the costs of buying a new home: covering the down payment or managing simultaneous mortgage payments for two properties. Real estate investors often rely on bridge loans, as well, when flipping properties.
The primary difference between a bridge loan and a traditional loan is the timeline for repayment. The term on a bridge loan typically lasts six to 12 months, while the term on a mortgage can be up to 30 years. In addition, lenders fund bridge loans faster compared to traditional mortgages — sometimes in as little as two weeks.
Bridge loans vary widely in structure, cost and terms. If you qualify, you could borrow a relatively large sum, anywhere from several hundred thousand dollars to more than $1 million.
For example, a bridge loan mortgage might involve cashing out equity from your current home and putting that toward a down payment on a new property — or, simply taking out a bigger mortgage for the new property. Another type of bridge loan uses both homes as collateral. Some carry monthly or interest-only payments, while others require either upfront or balloon payments.
Most share a handful of general characteristics, though:
Say you get a bridge loan for $70,000, with your current home worth $100,000 and a $50,000 balance left on your mortgage. Of that $70,000, $50,000 would go toward the mortgage, and another $2,000 would go to the loan’s closing costs. Thanks to the bridge loan, you’d now have $18,000 for your next purchase (plus the proceeds of the sale of your current home).
The process of applying for a bridge loan is similar to applying for a regular mortgage:
If you’re interested in a bridge loan, be prepared for potentially paying a higher interest rate than you would for a standard conventional mortgage loan. Many lenders base their bridge loan rates on the prime rate (currently at 8.5 percent), while others set their rates a couple of percentage points higher than the prime. Bridge loans generally have higher rates because they’re short-term financing solutions that provide funds quickly. Lenders charge more for this convenience.
If you’d prefer to explore other options, the following could be ideal:
A bridge loan can span anywhere from six months to three years, though some lenders might offer longer repayment timelines. There’s usually a fixed deadline by which the entire loan amount must be repaid.Typically, you’ll pay interest-only installments initially, or no payments at all, then a final lump-sum payment due at the conclusion of the term. Ideally, you’d structure the loan so that proceeds from your home sale coincide with the full repayment or the start of the repayment period.
While the funding timeline varies from lender to lender, some can provide loan proceeds in as little as two weeks.
Arrow Right Contributor, Personal Finance
Erik J. Martin is a Chicago area-based freelance writer/editor whose articles have been featured in AARP The Magazine, Reader's Digest, The Costco Connection, The Motley Fool and other publications. He often writes on topics related to real estate, business, technology, health care, insurance and entertainment.
