What Is a Bridge Loan?
8 Min Read | Published: March 28, 2025
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How does a bridge loan work? Learn what bridge loans are, the benefits and risks to consider, and if a mortgage bridge loan is the right option for you.
At-A-Glance
- A bridge loan offers short-term financing to help you buy a piece of real estate while you wait for another property to sell.
- Bridge loans may be used as a second mortgage or to pay off an existing mortgage.
- Using a bridge loan may help you become a more competitive buyer in a crowded real estate market, but they can also carry higher interest rates than a conventional mortgage.
The process of selling one home and buying another can be a lot to handle. You need to simultaneously ensure your existing home is going to be appealing to buyers while balancing your excitement about your life in your next home. And it can add an extra layer of complexity if you find your dream home before your current home is sold.
Since many people use the sale of their current home to cover the down payment on the next house, you can be in a bind if your place isn’t selling. A bridge loan can help solve this problem, offering you a lifeline to buy the new property with short-term financing you can pay off when your home finally sells.
In this article, we’ll explore what bridge loans are, how they work, and the benefits and risks to consider before using one to bridge the gap between selling your current home and buying your next one.
What Are Bridge Loans?
Bridge loans vary significantly in terms of how they are structured, their terms, and their cost.1
A bridge loan is a secured loan that can help to cover transitional costs, such as purchasing a new home while waiting for an existing home to sell.2 Bridge loans are considered a specialty financing option that literally helps bridge the gap between two real estate transactions. Though bridge loans are commonly used in residential real estate transactions, they may also be used by companies when buying commercial real estate or used to support businesses in areas that have been in the path of a natural disaster.
How Does a Mortgage Bridge Loan Work?
The term of a bridge loan may range from six months to three years.3 It may require a monthly payment or can be set up as a mix of upfront and lump sum payments. A bridge loan is a secured loan that uses real estate as collateral to back the loan; however, since a bridge loan is short-term specialty financing, it may have a slightly higher interest rate than a conventional mortgage loan.
The interest rate, fees, repayment schedule, and other conditions of the loan vary by lender. For this reason, it’s important to explore bridge loans from multiple lenders before applying for a loan.
Different Types of Bridge Loans
There are two types of bridge loans to use for a real estate transaction.
- As a Second Mortgage
If you opt to use your bridge loan as a second mortgage, you can use the money to pay the down payment on the new home while not impacting your first mortgage. This method can be beneficial if your existing mortgage has favorable loan terms, like a low interest rate. - To Pay Off an Old Mortgage
You may choose to use the bridge loan to replace your existing mortgage, so you’ll only have one mortgage open at any one time. This method can be a good idea if you want to free up your home’s equity to use for a larger down payment on a new place. However, if the bridge loan is significantly higher than your current mortgage, it could become tricky to manage if your existing property doesn’t sell as quickly as planned.
Pros and Cons of Bridge Loans
Pros of Bridge Loans:
There are several benefits to bridge loans, which may include:
- Quick Access to Funding
Bridge loans are meant to provide fast funding, so you may be able to get one for a real estate transaction that comes up unexpectedly. - Making You a More Competitive Buyer
If other home buyers don’t have money on hand for a transaction, they may have a contingency that buying a new property requires them to sell the existing one. Having access to a bridge loan could make your offer more compelling since the seller doesn’t have to wait on the contingency. - Providing Repayment Flexibility
You may be able to work with the lender to set the repayment schedule so it favors your situation. For example, you may want to make one lump sum payment at the end of the term or make monthly payments along the way. Many bridge loans also don’t have repayment penalties, giving you the flexibility to repay the loan early if you choose.
Cons of Bridge Loans:
There are also potential drawbacks to consider before getting a bridge loan, such as:
- Higher Interest Rates
Because bridge loans are specialty loan options that you can get quickly, the interest rate is often higher than a standard conventional mortgage. - Shorter Repayment Terms
Since a bridge loan is designed to be paid back in no more than a few years, it could result in higher loan payments during that period. - More Pressure for Fast Repayment
If the sale of your current property is delayed for any reason, even if it’s beyond your control, you could still have to pay on the bridge loan. - Risk of Foreclosure
When you apply for a bridge loan, you agree to use your current home as collateral. If, for any reason, you default on the bridge loan, you could face your current property going into foreclosure. It’s extremely important that you run financial calculations before accepting a bridge loan to ensure you can continue to meet your existing mortgage payments while also covering the cost of the new loan.
How Much Does a Bridge Loan Cost?
The cost of a bridge loan depends on several factors, including:
- Interest Rate
Since lenders take on more risk with short-term bridge loans, the interest rate is likely to be higher than other loans. However, you may be able to set up a loan structure where you make interest-only payments for a period and cover the principal at the end of the loan term, which hopefully coincides with the sale of your home. - Fees
Fees vary by lender but may include loan origination fees, appraisal fees, and closing costs. - Credit Score
Applicants with a higher credit score may be able to receive a more favorable interest rate on a bridge loan. - Repayment Structure
Some bridge loans may require interest-only payments during the loan term, with a lump-sum payment at the end of the term. However, other bridge loans may require an upfront payment, followed by a lump-sum payment at the end of the term. The repayment structure can change the cost of the loan, especially if it changes how much interest you pay over time.
Did you know?
A bridge loan lender is likely to review your credit history and credit score before issuing a lending decision. Before you apply, it can be helpful to check your credit score for free and take steps to establish and build good credit to qualify for the most favorable interest rates and loan terms.
Alternatives to Bridge Loans
If you need quick access to money for a real estate transaction or other reason, there are alternatives to bridge loans to consider, including:
- Home Equity Loans
If you have equity in your home, meaning you’ve paid off more than you currently owe on the mortgage, you may be able to tap into that equity for quick cash. A home equity loan offers a lump sum loan with a fixed interest rate and set monthly payment. These loans tend to be longer term than a bridge loan, so they can provide more flexibility if you have a longer timeline to sell your property. - Personal Loans
A personal loan is a smaller, unsecured loan, meaning that your property isn’t considered as collateral to back the loan. For this reason, personal loans may have slightly higher interest rates than secured loans. However, they can be used for any reason, and you can often receive funds in only a few days if approved. - Credit Cards
For a smaller balance transaction that you intend to repay quickly, you may opt to put the balance on a credit card and pay it off the next month before you need to pay interest.
Frequently Asked Questions
Whether there is a monthly payment on a bridge loan depends on the loan provider and the loan terms. Some lenders may require a monthly interest-only payment along with a lump-sum payment at the end of the term. Others may require a mix of upfront and end-term payments. Check with your bridge loan provider before you apply.
Each lender has different criteria when considering applicants for a bridge loan. Having equity in your current home, a good or excellent credit score, and a favorable credit history may increase your chances of qualifying for a bridge loan.
The Takeaway
A bridge loan can help you purchase a new home as you wait patiently for your current home to sell. These short-term loans can charge a slightly higher interest rate than a conventional mortgage. However, the higher temporary cost may be worth it if it allows you to purchase the new home you want.
1,2,3 “What is a bridge loan and how does it work?,” Bankrate
Brooke Joly is a writer on a mission to unravel the mysteries of personal finance and make them accessible to the everyday reader. When she’s not behind the keyboard, you can find her enjoying the outdoors in Charleston, SC.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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