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May 7th, 2022 at 11:00 am

What is a bridge loan in real estate?

Moving from one home to another sounds simple in theory. Sell your home, then use the funds from the sale to purchase your new home. However, timing isn’t always on your side in this type of transaction. 

What if you find the perfect home but haven’t sold your current home yet? How will you get the money you need? This is the exact scenario where a bridge loan might come in handy. 

What is a bridge loan?

In the simplest terms, a bridge loan is a short-term home loan used to bridge the time between purchasing your new home and selling your old home. In practice, things get a little more complicated. 

This guide will go over different types of bridge loans and talk about some of the pros and cons of this financial tool.

How does a bridge loan work?

In addition to its uses in real estate, bridge loans can also be used by businesses while they wait for more long-term financing options. However, since this use involves different circumstances, this guide will focus on a bridge loan as it pertains to real estate and better mortgage.

All bridge loans and bridge financing in real estate have a few things in common:

When would you need a bridge loan?

Bridge loans aren’t always appropriate for people purchasing a new home. In fact, their popularity has fallen quite significantly since the housing crisis of the late 2000s. 

That said, there are still several instances in which bridge loans can be useful tools:

Navigating the terms of bridge loans

Within the world of real estate, there isn’t much variation when it comes to bridge loans. Most are applied for and used in a similar way across the board. However, terms may vary from lender to lender so you’ll want to be on the lookout for the best terms possible.

Some of the terms worth considering include:

Risks of bridge loans

Buying a new home can often be a very emotional purchase. When you add in the speed that’s sometimes needed to secure the home you want, you’re liable to allow those emotions to take the place of a more logical, reasoned approach to borrowing.

While bridge loans are an appealing option for you if you need money fast, there are still risks that are worth considering before you decide if a bridge loan is right for your financial situation:

That puts you in a tough spot—one that could get even tougher if you can’t find a new buyer before your bridge loan comes due.

Other options to consider

Understanding the risks involved with a bridge loan is a good place to start. However, if you end up deciding that it’s not a fit for you and your situation, you’ll want to be aware of your other options. It is also important to understand what amortization in real estate is and how it could play a pivotal role in your next house purchase. Acceleration clause real estate is also an essential principle to understand. 

Let’s take a look at some other ways to access the money you’ve accrued in your current home.

Home equity loan

A home equity loan is just what it sounds like. It’s a loan in which the collateral you use to secure the loan is the equity you’ve accrued in your home. You’re typically given a lump sum and are free to pay it off like you would a normal loan.

Some advantages of a home equity loan include:

However, there are a few disadvantages to home equity loans as well:

HELOC

A similar option to the home equity loan is a home equity line of credit, or HELOC. The main difference is that while the home equity loan results in a lump sum, a HELOC gives you access to a line of credit that’s secured by the equity you have in your home. 

In this case, you can take out only what you need so you’re not paying interest on the money you don’t need to use.

Some advantages of HELOCs include:

HELOCs do come with their own considerations though:

Berkshire Hathaway: buying and selling made simple

Buying and selling homes can be an intricate process. Bridge loans are one financial instrument to consider that may help you on your home buying journey. Even so, it can be hard to know what the best option is for your unique scenario. That’s why it’s worth consulting the experts.

At Berkshire Hathaway HomeServices California Properties we have experts ready to help you. Working with a qualified real estate agent will allow you navigate the market with finesse. They’ll ensure you get the best deal on your new home and the best return on your old home. 

When you’re ready to start your journey, we’re ready to help.

Sources: US News and World Report, US News and World Report, US News and World Report

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