A bridge loan, which is also sometimes referred to as a swing loan, is a short term loan that is used by a borrower who has not sold their current home, to help them purchase a new home. An individual who has found their new "dream home" before they have sold their old home, or worse yet, before they have even put their old home on the market, has a few options available to them to purchase the new home, including:
Assuming that these options are not available to the borrower, the bridge loan can be an attractive alternative to obtain that dream home. There are two basic types of bridge loans:
As with most speciality loans, the terms and conditions on bridge loans may vary greatly from lender to lender. Borrowers need to make sure that they fully understand the loans that they are considering. The best deals on bridge loans will typically come from a lender that is providing both the bridge loan and the mortgage loan for the second home.
Bridge Loan Interest Rates
Interest rates on bridges loans are higher than regular mortgage rates. Interest rates on bridge loans can run as much as 2 percentage points higher than conventional 30-year mortgage rates.
Bridge Loan Costs
Bridge loans can have substantial fees and closing costs associated with them making them an expensive proposition. Fees and closing costs will vary from lender to lender.
Bridge Loan Terms
The term on a bridge loan (the amount of time until it must be paid off) can vary widely from lender to lender. The typical term for a bridge loan is one year, but lenders offer bridge loans with terms up to 36 months.
Alternatives to a Bridge Loan
In addition to the alternatives already listed at the beginning of this article, there are other loan alternatives to a bridge loan. A home equity line of credit (HELOC) can be used in place of a bridge loan to provide the necessary down payment funds. A borrower can either:
Using a HELOC in place of a bridge loan has some advantages. Most lenders do not charge any closing costs for a borrower to obtain a HELOC. In addition, the HELOC's interest rate may be lower than available bridge loan interest rates.
When using the HELOC as a means of obtaining down payment funds, it is important for the borrower to understand that they will have three simultaneous home loans:
As can be seen, many of the loan options available to a borrower to bridge them from an old unsold house to a new already purchased house will entail some level of financial hardship in the form of multiple simultaneous loan payments. The ideal situation is to have the old house on the market or sold prior to or while purchasing a new home to avoid a bridging option altogether. Barring this, a borrower will have to look at their own financial situation to see what will work best for them. The HELOC route will have the least costs associated with it but the borrower will be servicing multiple loans. The first bridge loan option mentioned above will have only one loan to service, but will entail higher costs.