Could a Bridge Loan Be Right for You?

What is a bridge loan?

A bridge loan is, at a high level, a short-term loan that’s used to bridge a gap in financial need until expected funds are secured. They’re commonly used during the process of buying and selling a home.

The benefits of a bridge loan

Bridge loans allow borrowers to use the anticipated profits from their pending home sale to secure their next home. This is the biggest benefit: instant access to cash.

Access to bridge loans is typically relatively quick, as they’re known to have faster application, underwriting and funding processes than traditional loans. Since they often use pending real estate as collateral, no income documentation is typically required, which can also expedite the process.

Granted security by instant cash, borrowers with bridge loans have some protection in the event their homes sell before they move. With a bridge loan, there may be no reason to find interim residence: you may be able to move into your dream home today.

Who benefits most from a bridge loan?

Given the short term of the loan, bridge loans may be well suited for people whose homes are likely to sell fast. If you aren’t in this category, higher interest rates and origination fees may keep you from getting to your forever home as fast as you had planned. However, if the bridge loan isn’t right for you, don’t worry—there are other solutions.

Three alternatives to bridge loans

1.      A home equity line of credit (HELOC) is a kind of home equity loan that allows you to borrow funds as needed and repay funds at a variable interest rate. HELOCs can be a better alternative to bridge loans because of their lower interest rates and longer terms, typically starting at five years. HELOCs may be well suited for borrowers with plenty of equity in their homes, low debt-to-income ratios, and high credit scores. Similarly, you may use a portfolio line of credit, which is backed by the value of stocks and bonds.

2.      Borrowing against your 401(k) can be the quickest, simplest, cheapest way to get the funds you need. This may be a better alternative to a bridge loan if you’re concerned about your credit score, interest rates or origination fees. Unlike the bridge loan, there’s no credit evaluation, interest rates are relatively low, and origination fees range from $50 to $100.

3.      A piggyback loan, or 80-10-10 loan, is a loan in which two mortgages are taken out at once. The first loan is a fixed-rate loan at 80% of the home’s cost. The second mortgage is an adjustable-rate loan (like a HELOC) at 10% of the home’s cost. Finally, the loan requires a 10% down payment. Although the first loan is fixed rate, the second loan can be paid off any time. An 80-10-10 loan may be well suited for borrowers concerned about down payments, private mortgage insurance, interest rates and loan term length.

The above content is shared for educational and informational purposes only. The content is not intended to be a substitute for professional legal or financial advice and should not be relied upon for making legal, financial or other decisions. Please consult your attorney or financial advisor before acting on any content on this website.

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