Bridge Loans Explained: How They Work, What They Cost, and When They're Worth It

You've found your next home, but your current home hasn't sold yet. You need $200,000 for the down payment, and it's locked in your existing home's equity. The seller won't accept a contingent offer.

This is the exact scenario bridge loans were built for — and it's not the only one. Bridge loans fill the gap between two financial events that don't perfectly align in time. But they're expensive, short-term, and carry real risk if your plan doesn't execute on schedule.

Here's everything you need to know.

What Is a Bridge Loan?

A bridge loan is a short-term loan (typically 6–12 months) that provides immediate capital while you wait for a longer-term financing event — usually the sale of an existing property or the closing of permanent financing.

Think of it as a financial bridge connecting "where you are now" to "where you'll be in a few months."

Key Characteristics

How Bridge Loans Work: Three Common Structures

Structure 1: Bridge Against Existing Property

The most common residential bridge loan.

You borrow against the equity in your current home to fund the down payment on your new home.

Example:

• Current [home value](/blog/appraisal-process-explained): $700,000
• Existing mortgage balance: $300,000
• Available equity: $400,000
• Bridge loan: $200,000 (bringing total liens to $500,000 = 71% CLTV)
• Use of funds: Down payment on new home

Repayment: When your current home sells, proceeds pay off both the existing mortgage ($300,000) and the bridge loan ($200,000). Remaining proceeds ($200,000 minus selling costs) go to you.

Monthly obligation during bridge period:

• Existing mortgage: $1,950/month
• Bridge loan (interest-only at 9.5%): $1,583/month
• New home mortgage: $3,200/month
• Total: $6,733/month

You're carrying three housing payments simultaneously. This is the fundamental risk of a bridge loan — you need the financial strength to handle this overlap.

Structure 2: Bridge With Deferred Payments

Some lenders allow you to defer all bridge loan payments until the loan matures or is repaid. Instead of monthly interest payments, the accrued interest is added to the loan balance.

Example using the same scenario:

• Bridge loan: $200,000 at 9.5% for 8 months
• Accrued interest: $200,000 × 9.5% × (8/12) = $12,667
• Total repayment: $212,667
• Origination fee (2 points): $4,000
• Total cost of bridge: $16,667

The advantage: no monthly bridge payment during the overlap period. The disadvantage: the total cost is higher because interest compounds, and lenders often charge a higher rate for deferred-payment structures.

Structure 3: Cross-Collateralized Bridge

The bridge lender takes a lien on both your current home and your new home. This provides the lender with more collateral and can result in:

• Higher loan amounts (up to 80% CLTV on combined properties)
• Slightly lower rates
• More flexibility on repayment

The risk: if your current home doesn't sell and you can't repay the bridge, the lender can foreclose on either or both properties.

The True Cost of a Bridge Loan

Bridge loan costs are frequently understated. Here's a complete cost breakdown:

Cost Calculation: $200,000 Bridge Loan, 8 Months, 9.5% Rate

That $200,000 bridge loan costs you roughly $19,000 — or 9.5% of the loan amount over 8 months.

Cost Comparison: Bridge Loan vs. Alternatives

When Bridge Loans Make Financial Sense

Scenario 1: Competitive Market, Non-Contingent Offer Required

In hot housing markets, sellers routinely reject offers contingent on the buyer selling their existing home. A bridge loan lets you make a clean, non-contingent offer — which can be the difference between winning and losing the deal.

When it's worth it: The new home is priced fairly or below market, and losing the deal would cost you more than $19,000 in future price appreciation or continued searching. In markets appreciating 5–8% annually, a $700,000 home gains $35,000–$56,000 per year. A few months of delay could cost more than the bridge loan.

Scenario 2: Relocation With Fixed Timeline

Your job starts in a new city on March 1. Your current home is listed but hasn't sold. Your family needs to move, the kids need to start school, and you can't wait.

When it's worth it: The relocation timeline is non-negotiable, and the cost of [temporary housing](/blog/dscr-loan-corporate-housing) (corporate apartment, extended-stay hotel, short-term rental) for 3–6 months plus two moves would approach or exceed the bridge loan cost.

Scenario 3: Investment Property Acquisition

You've identified a below-market investment property that requires a fast close (foreclosure, estate sale, off-market deal). You need capital quickly and will refinance into a permanent loan after closing.

When it's worth it: The acquisition discount exceeds the bridge loan cost. Buying a $400,000 property for $340,000 (15% discount) justifies a $15,000–$20,000 bridge loan cost.

Scenario 4: New Construction Timing Gap

Your new construction home is 90% complete and will be finished in 4 months. You need to sell your current home now to lock in the builder's pricing, but you need somewhere to put the sale proceeds and a way to fund the new home's down payment during the gap.

When it's worth it: The builder's deadline is real, and the pricing or incentives (rate buydowns, upgrades, price locks) you'd lose by delaying exceed the bridge loan cost.

When Bridge Loans Don't Make Sense

Your Current Home Isn't Selling

If your home has been on the market for 60+ days without strong interest, taking a bridge loan is adding risk, not solving a problem. The bridge loan has a fixed term — if your home doesn't sell within that term, you face:

• Extension fees (0.5–1 point per extension)
• Potential default
• Forced price reduction under time pressure

Better alternative: Reduce the price, improve the listing, or take the home off market and wait.

You Can't Afford Three Payments

If carrying your existing mortgage, the bridge loan payment, and the new mortgage payment would strain your finances, the bridge loan creates a dangerous cash flow crunch. One unexpected expense — car repair, medical bill, job disruption — could push you into distress.

The rule: You should be able to carry all three payments for at least 3 months beyond your expected bridge loan payoff date.

The HELOC Option Is Available

If you have an existing HELOC or can open one within your timeline, it's almost always cheaper than a bridge loan:

The catch: HELOCs take 4–6 weeks to open, and many lenders have tightened [HELOC underwriting](/blog/heloc-application-mistakes). If you need capital in 2 weeks, a HELOC may not work. The solution: open a HELOC before you need it. Treat it as a standby facility.

Where to Get a Bridge Loan

1. Banks and Credit Unions

Some banks offer bridge loans to existing customers, particularly those with deposit relationships. Terms tend to be more favorable than private lenders:

• Rates: 8.00–10.00%
• Origination: 0.5–1.5 points
• Requirements: Existing relationship, strong credit (720+), verified income
• Timeline: 3–4 weeks

Ask your current mortgage bank first — they already have your financial picture and may offer preferred pricing.

2. Dedicated Bridge Lenders

Companies that specialize in bridge financing:

• Kiavi — Investor bridge loans, fast closing
• [Lima One Capital](/blog/lima-one-capital-dscr-review) — Residential investor bridge programs
• RCN Capital — Bridge loans for investors, 1–4 unit properties
• Civic Financial Services — Bridge and fix-and-flip programs
• Finance of America Commercial — Bridge and blanket programs

3. Private/Hard Money Lenders

For the fastest closings (7–14 days) and most flexible qualifying:

• Rates: 10.00–14.00%
• Origination: 2–4 points
• Requirements: Primarily collateral-based (equity in property)
• Timeline: 1–2 weeks

Private lenders are expensive but can close when no one else can. Use them only when the deal economics justify the cost.

4. New-Generation Bridge Solutions

Several companies now offer "modern" bridge alternatives that function differently from traditional bridge loans:

• Knock — Provides funds to buy your new home before selling your old one. Knock buys the old home as a backup if it doesn't sell. Fees: ~1.25–1.9% of the old home's sale price.
• Homeward — Cash-backed offers. Homeward buys the new home with cash on your behalf; you purchase it from Homeward once your old home sells. Fees: Varies, typically included in the interest rate.
• Orchard — Similar model to Knock, focused on certain metro areas. Provides move-first purchasing power.
• Flyhomes — Cash offer program where Flyhomes makes the purchase, then you buy from them.

These programs are typically cheaper than traditional bridge loans and include contingency plans if your old home doesn't sell. The trade-off: they're available only in certain markets and have property eligibility requirements.

Bridge Loan Process: Step by Step

Week 1: Application and Evaluation

1. Contact 2–3 bridge lenders for quotes
2. Submit application with property details, income verification, and credit authorization
3. Lender orders appraisal on the collateral property
4. Provide documentation: existing mortgage statement, purchase contract for new home, listing agreement for existing home (if applicable)

Week 2: Underwriting

5. Appraisal completed and reviewed
6. Title search on collateral property
7. Lender evaluates exit strategy (how will the bridge be repaid?)
8. Conditional approval issued with any remaining documentation requirements

Week 3: Closing Preparation

9. Title insurance and closing documents prepared
10. Final review of conditions
11. Clear to close issued
12. Closing scheduled

Week 3–4: Funding

13. Sign closing documents
14. Bridge loan funds (same day or next day after signing)
15. Funds available for new home down payment

Total timeline: 2–4 weeks from application to funding. Private lenders can sometimes close in 7–10 days.

Bridge Loan Exit Strategies

Every bridge loan needs a clear, realistic exit strategy. The three most common:

Exit 1: Sale of Existing Property

The classic scenario. Your current home sells, proceeds pay off the bridge loan. This works when:

• Your home is in a marketable condition and priced correctly
• Local market conditions support a sale within your bridge term
• You have a listing agent and active marketing plan

Risk mitigation: Price your home slightly below market to ensure a quick sale. The cost of a 2–3% price reduction is often less than a bridge loan extension.

Exit 2: Permanent Financing (Refinance)

Common for investment properties. You close on the acquisition with the bridge, stabilize the property (renovations, tenant placement), then refinance into a conventional or DSCR loan.

Risk mitigation: Get a pre-approval for permanent financing before taking the bridge loan. Ensure the property will qualify for conventional financing post-renovation.

Exit 3: Asset Liquidation

Less common but viable. You repay the bridge by liquidating investments, receiving an expected bonus, or accessing other capital sources.

Risk mitigation: Have the capital identified and accessible. "I'll sell some stocks" is fine if the stocks are in a taxable brokerage account. It's not fine if the funds are in a retirement account with penalties and tax consequences.

Bridge Loan Mistakes to Avoid

1. No backup plan. What happens if your home doesn't sell within the bridge term? If your answer is "it will sell," you need a better answer. Have a price reduction schedule, a rental plan, or an extension agreement in place.

2. Underestimating carrying costs. Triple-payment months burn through reserves fast. Budget for the worst case — not the expected case.

3. Choosing the cheapest lender without evaluating reliability. A bridge lender that can't fund on time is worse than one that charges an extra half-point. Verify the lender's track record and funding certainty.

4. Ignoring the tax implications. Bridge loan interest may be deductible as mortgage interest (subject to the $750,000 total mortgage debt limit under TCJA) or as investment interest expense (for investment properties). Consult your CPA before closing.

5. Taking a bridge loan in a declining market. If home values in your area are dropping, the property you're using as collateral may appraise lower than expected, and selling your current home may take longer and net less than planned. Both factors increase bridge loan risk.

The Bottom Line

Bridge loans are expensive, short-term tools that solve a specific timing problem. They're not inherently good or bad — they're appropriate or inappropriate depending on your situation.

Take the bridge loan when:

• You need to act fast and alternatives (HELOC, contingent offer) aren't available
• Your current home is highly marketable and will sell within the bridge term
• The deal you're pursuing justifies the $15,000–$25,000 cost
• You can comfortably carry all payments during the overlap period
• You have a clear, realistic exit strategy with a backup plan

Skip the bridge loan when:

• A HELOC can achieve the same result at half the cost
• Your current home isn't yet listed or has been sitting unsold
• The math doesn't work — the bridge cost exceeds the benefit of acting now
• You'd be financially stressed carrying multiple payments

In most cases, the best bridge loan is the one you never need. Plan ahead: open a HELOC as a standby facility, build reserves, and time your transactions to minimize overlap. But when timing doesn't cooperate — and in real estate, it often doesn't — a bridge loan can be the right tool at the right time.

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HonestCasa helps you compare bridge loan options alongside HELOCs, cash-offer programs, and other alternatives. Explore your options →

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