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Why Should You Consider a Bridge Loan?

If you’re struggling to sell your old home and you’re trying to put a down payment on a new home, your finances may not be very happy with you. If this sounds like what you’re going through, it may be time to consider applying for a bridge loan.

What Is a Bridge Loan?

The simplest way to describe a bridge loan is to say that it is a type of loan that is meant to bridge the gap when you need money for a new home, but you’re also waiting to receive money from the sale of an old one.

To look at it another way, if you are in the process of selling your old home (but it hasn’t yet sold), and you’re in desperate need of finances for a new home (for a down payment or closing costs, for example), then it might be time to consider a bridge loan.

When it comes to bridge loans, so long as your old house can sell within the period that the loan agreement stipulates, there are very few risks and many benefits.

Let’s take a look at the pros and cons of bridge loans to determine if they’ll be beneficial to you.

Pros of Bridge Loans

  • Bridge loans tend to be very fast. This can help people who are in desperate need of cash to be covered nearly immediately.

  • Bridge loans can give you additional time when it comes to selling your house and buying your new house. In other words, you will have increased flexibility when you’re doing the real estate shopping tour.

  • If you’re in the process of going up against other buyers for your next/dream home, then you might be considered a better applicant for the new home if you have a bridge loan. This is because you’ll be showing whoever is selling your new home that you won’t be delaying the process for any financial reasons.

  • There are ways to avoid PMI (or private mortgage insurance) when you have a bridge loan.

Cons of Bridge Loan

  • Bridge loans, because of their short-term nature, tend to have much higher interest rates than you would find in a long-term loan.

  • You’re severely unlikely to get this loan if you have less than 20% home equity in your previous property.

  • A bridge loan is considered a type of secured debt, which means that you will have to put up assets – such as your old home – as collateral.

  • You’ll ultimately end up spending more money because you will be required to pay debt service on the bridge loan while you’re also paying for your current mortgage. To look at it another way, a bridge loan will end up costing you more money out of pocket as a homeowner.

  • If your home doesn’t sell within the timeframe that the loan servicer stipulates, you may end up having to pay for money on your old home, the bridge loan repayment, and money for your new home all at once.

At the end of the day, only you can determine if applying for a bridge loan is a good idea for your specific circumstances. Consider how much money you will need for your new house, the dire financial straits you may or may not be in with your current house, and the feasibility of your home selling within the time constraints of the bridge loan.

Going from there, weigh the pros and cons, then make the decision. Your wallet may thank you for it.


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