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Trying to buy and sell a home at the same time is difficult. No matter which side of the transaction happens first for you, there’s likely going to be a time where you have to either have to balance two mortgages or have to find temporary accommodations. Fortunately, if it’s the former, there are workarounds that you can use to make the financial burden a little easier.
One of those workarounds is known as a bridge loan. That said, like any loan, this funding solution has its advantages and drawbacks. I’ve laid them out for you below so that you can see if getting a bridge loan is the right choice for you.
What is a bridge loan?
A bridge loan is a form of short-term financing. This loan is used to bridge the gap between settling on a new home and settling on your old one. It works by giving you the funds upfront to pay off your old mortgage and potentially finance your down payment. Then, when your old house eventually sells, you can use the funds from that settlement to pay off the bridge loan.
The advantages of a bridge loan
- Gives you flexible buying options: Sometimes you fall in love with your new home before you find a buyer for your old one and that’s okay. Using a bridge loan will give you the flexibility in financing that you need to be able to buy your new home while your other one still remains on the market.
- Given out on a case-by-case basis: Unlike longer-term mortgage loans, bridge loans do not have industry-wide qualifying standards. Instead, the decision of whether or not to approve you for one of these loans is done on a case-by-case basis by the individual lender. You could be subject to easier qualifying requirements.
- Secured by the home: Bridge loans are secured by your old home, meaning that if you’re unable to pay back your loan, the lender will be able to foreclose on the home you’re trying to sell. They will not, however, be able to go after any of your other personal assets.
The disadvantages of a bridge loan
- High interest rates: Unfortunately short-term financing like this comes at a cost. You’ll likely be charged higher-than-normal interest rates for the privilege of being granted one of these loans. Always be sure to read the fine print and to make sure that you absolutely have the ability to pay back these fees before signing on the dotted line.
- Shorter loan term: One of the biggest risks to a bridge loan is the shorter loan term. Typically, the loan term only lasts six months. Yes, you may only need the financing for a short period of time, but what if your house does not sell during that window? Remember, even if you can’t find a buyer for your home during this time, you’ll still be on the hook for repaying the loan.
The bottom line
Bridge loans are a handy option to keep in mind when you’re trying to buy and sell a house at the same time, but that said, they’re not without risk. If you’re thinking of going this route, be sure to talk it over thoroughly with the lender and to read all of fine print so that you know what all of the risks could be.