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When buying a home, you may find that all your equity is tied up in your current property, making it tough to fund a down payment for a new one. This is where a bridge loan can help.

What Is a Bridge Loan?

A bridge loan is a short-term loan designed to provide access to the equity in your current home so you can make a down payment on a new property. It “bridges the gap” until you sell your current home.

Note: Many people use the term “bridge loan” incorrectly when they actually mean tapping into their existing home’s equity to fund a new purchase. A true bridge loan is used when you plan to sell your current home, not keep it.

How Does Bridge Loan Financing Work?

Here’s what you need to know about bridge loans:

Short-term solution: They’re designed to be paid off quickly, usually within 12 months or less.
Equity access: The loan allows you to use the equity from your current home as a down payment on your next property.
Not for keeping properties: If you plan to keep your existing home, a bridge loan is not the right option. Consider a home equity loan or cash-out refinance instead.

What If You Want to Keep Your Home?

If you plan to keep your current home as a rental or for long-term use, here’s what to consider:

Cash-out refinance or home equity line of credit (HELOC): This option allows you to access your home’s equity without committing to sell it.
Be honest on your loan application: You must declare your intent to occupy a property for at least 12 months; otherwise, it could be considered fraud.

What If You Plan to Sell Your Home?

If selling your current home is the plan, you have two main options:

Sell First, Buy Later: While it might mean renting temporarily, selling first can reduce financial stress. You’ll know exactly how much money you have for your next purchase and can use your equity to clear other debts.
Use a Bridge Loan: If you prefer not to rent, a bridge loan can provide the needed funds for your down payment. However, you must qualify for both your existing mortgage and the new one based on your income.

How to Navigate Bridge Loans Effectively

Here’s how to approach bridge loans and alternatives:

Plan A: If you qualify for both mortgages and have some liquid funds, consider a smaller down payment on the new home. Once your current home sells, use the proceeds to recast your new loan. Check out our recast guide here.
Plan B: If you qualify but don’t have enough cash, consider a second mortgage or HELOC on your current home. You only pay interest on what you use, making it a cost-effective alternative.
Plan C: If you can’t qualify for both homes, a true bridge loan becomes necessary. These are harder to find, typically offered by banks, and come with higher rates—usually 2.5% to 3% above the prime rate.

Understanding a True Bridge Loan

A true bridge loan involves combining the equity of both properties (current and new). Here’s an example:

Combined Loan-to-Value (CLTV): Most lenders require a CLTV of 70% or less.
Example: You have a $500,000 current home with a $100,000 mortgage and want to buy a $500,000 new home. With $400,000 equity, you can finance the new home without a down payment under a true bridge loan structure.

Final Thoughts on Bridge Loan Financing

Bridge loans can be complex and challenging to navigate. If you have questions or want to explore the best options for your situation, reach out to us.

As always, when you think mortgage, think Mark!