What Is A Bridge Loan, And Is It Right For You?

Many homeowners looking to buy a new house hope to use the money from their current home sale to help fund the purchase of a new home. But what happens when you have to move quicker than you can sell? A bridge loan may be your solution to securing your dream home.

While Rocket Mortgage^® doesn’t currently offer bridge loans,  we are dedicated to helping you understand all your options as a homeowner.

Let’s take a look at what a bridge loan in real estate is, the advantages and disadvantages of a bridge loan, and when you might consider using one.

What Is A Bridge Loan?

Bridge loans, also referred to as swing loans, are short-term loans that borrowers can use until they secure permanent financing or complete a debt obligation. Bridge loans are known for having high interest rates, and they require some form of collateral – usually your home that you’re trying to sell. They also vary by repayment method and loan term.

These loans are commonly used in real estate, especially by people buying and selling a home at the same time, but many types of businesses will also use them. Bridge loans are considered a type of non-mortgage or specialty financing, and they’re not designed to replace an existing mortgage.

Ideally, homeowners will have their home under contract before making an offer on a new home, but this doesn’t always happen. A bridge loan enables home buyers to bridge the gap between the two real estate transactions.

How Does A Bridge Loan Work?

Bridge loans are designed to be as short-term as possible. Unlike a traditional mortgage that can take 15 – 30 years to repay, a bridge loan repayment period is typically 6 months to a year.

Some lenders may structure their bridge loans with monthly payments, while others require a mix of upfront or lump-sum payments.

Here are three of the most common structures for bridge loans:

• The borrower takes out a bridge loan as a second mortgage and has two separate payments.
• The borrower has a package deal and rolls their existing mortgage and new bridge loan into one payment.
• A borrower has a balloon payment at the end of the term.

Bridge loan terms, conditions and fees all depend on the lender and the borrower’s needs.

Average Bridge Loan Fees

Compared to conventional loans, bridge loans are generally more expensive due to higher interest rates, APR and other fees. Interest rates for these loans typically range between 8.5% and 10.5% but can be higher or lower depending on factors like your credit score. Additionally, you’ll want to consider bridge loans’ closing costs, which generally range from 2% – 5% of the total loan amount but can be a bit lower.

The number of fees you’ll have to pay with a bridge loan, though usually fewer than required with a traditional mortgage, vary from lender to lender. Fees when buying a house depend on both property and market conditions but typically include:

• Administration fees
• Origination fees
• Credit check fees
• Title search and insurance fees
• Appraisal fees
• Escrow fees
• Notary fees

When To Consider A Bridge Loan

A bridge loan isn’t meant to replace your current mortgage, but it can come in handy during the simultaneous home-buying and selling process. Here are some examples of when you might consider using a bridge loan:

• It’s a hot market and you want to close on a new home before selling your current home.
• The closing date on your current home is after the closing on your new home.
• You can’t afford a down payment without selling your current home.
• You’re moving out of state and your moving date is before you can sell your home.
• The seller won’t accept an offer contingent on the sale of your current home.

How To Get A Bridge Loan

ike many types of home loans, you’ll apply with a mortgage lender to take out a bridge loan. To determine whether you qualify, lenders look at your credit score, credit history, debt-to-income ratio (DTI) and how much home equity you have.

The standard maximum amount you can borrow with a bridge loan is 80% of your loan-to-value ratio (LTV). This means, you’ll need a minimum of 20% equity in your current home to qualify for a bridge loan.

Be sure to review your lender’s requirements, which may vary from other lenders.

Pros And Cons Of Mortgage Bridge Loans

The biggest advantage to bridge loans is the flexibility to make a contingency-free offer on a new home. However, there’s always a price to convenience. Although bridge loans give you quick access to cash, they may come with large expenses due to higher interest rates and fees associated with an additional mortgage loan.

Here’s a breakdown of some of the advantages and disadvantages associated with bridge loans:

Alternatives To Bridge Loans

If you’re caught between selling one house and buying another, it’s worth noting that not all mortgage lenders offer bridge loans. But you may not need a bridge loan, regardless. Let’s take a look at some other real estate financing options.

Home Equity Loans

Home equity loans are a popular alternative to bridge loans. A home equity loan provides a lump-sum payment borrowed against your current home’s equity. This is a great option for home buyers who know the exact amount needed to purchase a new home.

Home equity loans have longer terms and more favorable interest rates, but this long-term financing route means you’ll have multiple mortgages. It’s also important to note that some lenders may not approve a home equity loan if the home is on the market.

Home Equity Line Of Credit

A home equity line of credit (HELOC) is similar to a home equity loan. A HELOC allows you to use the equity you’ve built in your current home, but it’s in the form of a credit card.

HELOC interest rates vary but are typically more favorable than bridge loans and only charged on the amount of money you use. Additionally, some lenders may not approve a HELOC if the home is on the market.

Personal Loans

A personal loan is another alternative option to bridge loans. To qualify for a personal loan, you must have a strong credit history, a clear history of on-time payments and a low DTI. Personal loans are secured with personal assets, and terms and conditions will depend on the individual lender.

If you want to know more about the personal loan process, Rocket Loans^SM can help.

80-10-10

80-10-10 loans allow home buyers to make a 10% down payment and then obtain two mortgages. The first mortgage is for 80% of the purchase price on the new house, and the second mortgage is the remaining 10%. Once the borrower’s first home sells, they can use the proceeds to pay off the smaller, second mortgage.

This financing option is beneficial to home buyers who can only afford to make a lower down payment.

Business Line Of Credit

For businesses in need of financing for short-term expenses, a business line of credit is available. This revolving loan only accrues interest based on what is drawn. Loan terms are generally a few months up to several years.

The Bottom Line

It can be difficult to sell a home and buy a new home simultaneously. In real estate, bridge loans can be beneficial to homeowners needing cash flow during a transitional period that came about suddenly or unexpectedly.

Although bridge loans can help you make a quick and contingency-free offer on your dream home, it may ultimately result in more debt. If your home doesn’t sell as fast as you hope it will, you may end up with a second mortgage and multiple monthly payments. It’s important to consider all your financing options as well as market trends before making a big real estate purchase.

Are you ready to take the next step in your homeownership journey? Start the approval process for your new home today with Rocket Mortgage.