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Bridge Loans 101

Bridge Loans 101


You're moving. You've found the house of your dreams, but you can't buy it until you sell your current home. If that sounds familiar, you have lots of company. The phrase "bridge loan" is also probably familiar. Most people have heard of bridge loans but knowing their ins and outs, pros and cons, is definitely in order if you're selling one home and buying another.

As the name implies, bridge loansalso called gap loans or interim financingprovide the funds you need to buy that dream home before you actually have the proceeds from the sale of your present home. Bridge loans are usually used to cover part or all of the down payment, closing costs, or perhaps to enable you to pay off your existing mortgage.

Drilling down to the details a bit, you should know:

  • Bridge loans are usually written for six to 12 months.
  • You must qualify, as you do for any loan or mortgage, although the process is usually quicker.
  • Terms can vary. You could be responsible for monthly interest-only payments with the principal due when you sell your house or, as with a regular mortgage, you may have monthly interest + principal payments.

A bridge loan can be a great solution to a financing dilemma but, of course, there's no such thing as a free lunch. It IS a loan, and it comes at a cost. Because it is a short-term loan, you will be paying a higher rate than with a primary mortgage. In fact, depending on the terms of your loan, you could find yourself responsible for paying down two loans at the same time. Bridge loans also entail the same kinds of fees associated with any mortgage. And there is always the specter of "What if I can't sell my house?" hanging over you, unlikely as that may be. You are still responsible for paying the bridge loan; if, like most people, your current home is your security, you may be vulnerable.

That said, a bridge loan can be a life saver. In addition to making your dream home possible, there are other benefits. With a bridge loan you can avoid mortgage insurance. It might also give you a leg up over other potential buyers as it tells sellers you're a good financial bet and the deal is not likely to fall apart. That can be important in a hot seller's market like this.

Yet another benefit is that Compass can recommend qualified lenders who will give you a competitive rate. In fact, Compass offers the option of fronting the first six months of your loan payments. Bridge loans are yet another way Compass is working to make buying or selling a home easy. Whether or not there's a bridge loan in your future, I certainly hope Compass is. The Rambaud Guardia team is ready when you are!

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