Bridge Loan: The Tool to Buy and Sell at the Same Time

In the world of real estate, timing is everything. Whether you're upgrading to a larger space, downsizing, or simply seeking a change of scenery, the transition between selling your current home and purchasing a new one can be fraught with financial and logistical challenges. In fact, buying a new home before selling your current home or timing the sale and purchase is often the biggest challenge our clients face. This challenge is exacerbated in this low-inventory housing market.

We have several tools we use when our clients want to a buy a new home before they sell their current home or want to seamlessly sell and buy simultaneously. One tool that we are now recommending our clients consider is the bridge loan. As a real estate expert, I want to delve into what bridge loans are, their benefits, and some of the drawbacks to consider.

What is a Bridge Loan?

First off, a bridge loan is a short-term financing option designed to bridge the gap between your current home's sale and the purchase of your new home. This type of loan allows homeowners to borrow up to 70-80% of their current home's value. The funds from a bridge loan can be used in two main ways: to pay off the existing mortgage and use the remaining money as a down payment for a new home, or as a second mortgage to directly finance a down payment for your next home. Each mortgage lender has their own requirements and be sure to consult a trusted mortgage loan professional.

Interest payments on bridge loans are typically limited to the interest itself, with the principal due at the end of the loan term, which usually does not exceed one year. The idea is to pay off the bridge loan quickly, often with proceeds from the sale of your current home, aligning perfectly with the loan's purpose to "bridge" your financing needs temporarily. I emphasize to my clients that a bridge loan is a short-term financing strategy and not a long-term mortgage option.

Advantages of a Bridge Loan

1. Flexibility in Home Buying and Selling: Bridge loans offer the flexibility to make a down payment on a new property before selling your existing home. This can be particularly advantageous in our current low-inventory, hyper-competitive housing market, where you need to act immediately to secure the home you want.

2. Immediate Access to Funds: Since bridge loans are designed for short-term financing, they are often, not always, processed more quickly than traditional mortgages. This rapid access to money means you can move forward with purchasing a new home without waiting for your current home to sell.

3. Interest-Only Payments: With a bridge loan, you're typically only required to make interest payments until the loan is paid off. I think this is one of the best features of a bridge loan. There is no free-lunch but the interest-only nature of a bridge loan is not budget-busting during the transition between selling and buying homes.

Disadvantages of a Bridge Loan

1. Higher Interest Rates: Due to their short-term nature and increased risk to lenders, bridge loans come with higher interest rates compared to traditional mortgages. This means you'll pay more for the convenience and flexibility that bridge loans offer.

2. Risks of Paying Two Mortgages: To me, this is the biggest risk we see in a bridge loan. If the sale of your current home is delayed, you may find yourself in the position of paying two mortgages - both your original mortgage and the bridge loan. The key to mitigate this risk is to have a full understanding of what your house will sell for and more importantly how long it will take to sell and close on the sale of your home.

3. Short Repayment Term: The typically one-year term of a bridge loan means that you'll need to repay the loan relatively quickly. This pressure can be compounded if the sale of your current home takes longer than anticipated. If our client is considering a bridge loan we do a full analysis and pricing strategy to ensure that the home can be sold in a timeframe that meets our client’s budget and is less than 1 year.

Conclusion

Bridge loans can be an effective tool for buying your new home before you sell your current home.  A bridge loan paves the way between selling your current home and purchasing a new one, offering flexibility, immediate access to funds, and the convenience of making interest-only payments. However, the higher interest rates, potential for double mortgage payments, and the short repayment timeline are important factors to consider and manage. As with any financial decision, it's essential to weigh the pros and cons and consider your unique situation before proceeding with a bridge loan.

Be sure to work with a real estate professional, do your homework and know how much your home will sell for and all expenses associated with a bridge loan, including how long it will take to sell your home. If all of the disadvantages and risks associated with a bridge loan are managed and mitigated you may find that the bridge loan is the ideal tool for you to buy a new home before you sell your current home stress-free.

Questions about how to transition from your current home to your next home? Contact Jeff Higgins at jeff@higginspartners.com or call/text at (248) 233-6165