What a bridge loan is and when people use it

A bridge loan is a short-term loan that lets you borrow money against something you own — usually a house — while you wait for another financial event to happen. The most common use is buying a new home before you've sold your old one. You borrow against your current house, use that money to buy the new one, then repay the bridge loan once your old house sells.

Bridge loans typically last between a few weeks and a year, though most close within three to six months. The lender charges interest on the borrowed amount, plus fees for originating and closing the loan. Because the loan is secured by your home, the interest rate is usually lower than an unsecured personal loan, but higher than a traditional mortgage.

For lower-income households, bridge loans can create real problems. The monthly payments are often steep, the fees add up quickly, and if your old house doesn't sell on schedule, you could end up paying for two mortgages at once — a situation called "double payment shock" that forces many families into default.

Key Takeaways

  • Bridge loans let you borrow against your current home to buy a new one before the old one sells, but they charge interest and fees that can cost thousands of dollars.
  • If your old house doesn't sell within the loan term, you may owe payments on both the bridge loan and your new mortgage at the same time.
  • Lower-income buyers often face higher interest rates on bridge loans because lenders see them as riskier, and some lenders avoid this market entirely.
  • Alternatives like contingent offers, home equity lines of credit, or waiting to sell first can avoid the cost and risk of a bridge loan.
  • If you do take a bridge loan, read the fine print for prepayment penalties, interest-only periods, and what happens if you can't repay on time.

How much a bridge loan costs and who pays what

Bridge loan costs break into three parts: interest, fees, and the risk of double payments. Interest rates typically range from 4% to 8% annually, though rates vary by lender, your credit score, and how much equity you have in your current home. A lower-income borrower with a credit score below 680 or less than 20% equity may pay the higher end or be turned down entirely.

Fees usually include an origination fee (0.5% to 2% of the loan amount), appraisal fee ($300 to $700), title search and insurance ($200 to $400), and underwriting and processing fees ($500 to $1,500). On a $150,000 bridge loan, these fees alone could total $3,000 to $5,000 before you pay a single dollar of interest.

The real cost emerges if your old house doesn't sell quickly. If you're carrying both a bridge loan payment and a new mortgage payment for three months, you could pay an extra $2,000 to $4,000 in interest and principal depending on the loan sizes. Some bridge loans include a "soft second" option, where the lender agrees to subordinate (take lower priority than) the new mortgage, but this usually costs more upfront.

Why lower-income borrowers face steeper rates and tighter terms

Lenders price bridge loans based on the risk that you won't repay. For lower-income households, that risk looks higher on paper: less savings to cover two payments, less stable employment history, and a home that may take longer to sell in a slower market. A lender sees a borrower with $30,000 in savings and a $200,000 home as riskier than one with $100,000 in savings and a $500,000 home, even if both have the same income.

Some lenders straightforward don't work with borrowers below a certain income threshold or credit score. Others require a larger down payment on the new home (25% instead of 10%), proof of a cash offer on the old house, or a personal may provide that puts your other assets at risk. These requirements lock out many lower-income buyers who could otherwise afford the new home.

A few lenders specialize in bridge loans for lower-income borrowers, but they charge 1% to 3% more in interest to offset the higher default risk. Shopping around matters: a 6% rate from one lender versus 8% from another costs you $3,000 more on a $150,000 loan over six months.

What happens if your old house doesn't sell in time

Most bridge loans have a maturity date — usually 6 to 12 months — when the full balance is due. If your old house hasn't sold by then, you have three options, none of them good for a lower-income household. First, you can extend the loan. The lender may agree to extend for another three to six months, but they'll charge an extension fee (usually $500 to $2,000) and may raise the interest rate. You're also paying interest on the full borrowed amount for longer, which adds hundreds or thousands to your total cost.

Second, you can refinance the bridge loan into a longer-term loan, converting it into a home equity loan or a cash-out refinance on your new mortgage. This moves the debt into a different product but doesn't solve the underlying problem: you're borrowing more money against your home to cover a shortfall. Third, you can default. If you can't pay both the bridge loan and your new mortgage, the lender can foreclose on your old house (if that's what secures the bridge loan) or place a lien on your new house. Either way, your credit score drops, and you may lose the home you were trying to buy.

Alternatives that cost less or carry less risk

Before taking a bridge loan, explore whether another path fits your situation better. A contingent offer on your new home makes the purchase contingent on selling your old one first. This removes the need to borrow at all, though it makes your offer less attractive to sellers in a competitive market. In slower markets, contingent offers are common and accepted.

A home equity line of credit (HELOC) on your current home lets you borrow against your equity without a fixed maturity date. You pay interest only on what you draw, and you can repay on your own timeline. HELOCs usually carry lower interest rates than bridge loans (4% to 7%) and lower fees. The downside is that HELOCs take longer to set up — typically 30 to 45 days — so they don't help if you need money when ready.

Waiting to sell your old house first, then buying the new one, eliminates the bridge loan entirely. This works if you're not in a rush and can live with your current home for a few extra months. You avoid all the fees and interest, and you know exactly how much money you have for the new purchase. A personal loan or credit card cash advance can cover a short gap if you only need a few thousand dollars for a down payment or closing costs. Interest rates are higher (8% to 36%), but the loan is unsecured and usually closes in days. This only works if the amount is small relative to your income.

What to check before signing a bridge loan agreement

If you decide a bridge loan is the right choice, read the loan agreement carefully for these terms. A prepayment penalty is a fee some lenders charge if you repay early — when your old house sells faster than expected. This can be 1% to 3% of the loan amount. Avoid this if possible. An interest-only period lets you pay interest only for the first few months, then switch to principal and interest. This lowers early payments but raises later ones. Make sure you can afford both.

Know exactly when the loan is due and what the lender will charge to extend it. Get extension terms in writing before you sign. Ask what secures the loan: is it your old house, your new house, or both? If the lender can foreclose on your new home, you're taking on more risk. Some lenders require a new appraisal if you extend the loan — budget for this cost. If the lender agrees to take second position behind your new mortgage (called a subordination clause), confirm this in writing. Without it, your new lender may refuse to close.

How to shop for a bridge loan if you decide to take one

Start with your current mortgage lender or bank. They already know your payment history and may offer better rates or waive some fees as a customer. Ask whether they offer bridge loans and what their rates and terms are for your situation. Next, contact local credit unions. Credit unions often have lower rates and more flexible terms than banks, especially for members with established accounts. Some credit unions specialize in bridge lending and understand the lower-income market better than national lenders.

Online lenders and mortgage brokers also offer bridge loans. Use a mortgage broker to shop multiple lenders at once — they can compare rates and terms without you filling out separate applications. Be wary of lenders who promise fast approval without checking your credit or home value; they're usually charging much higher rates to offset the risk. Get quotes from at least three lenders and compare the total cost, not just the interest rate. A lender with a 0.5% lower rate but $2,000 in extra fees may cost you more overall. Ask each lender for a Loan Estimate, which shows all fees and the total interest you'll pay over the loan term.

Frequently Asked Questions

Can I get a bridge loan if I have bad credit?

Some lenders work with credit scores as low as 600, but you'll pay higher interest rates and fees, and you may need to put down a larger down payment on the new home or provide proof that your old house will sell. Credit unions and specialized lenders are more likely to work with lower credit scores than national banks.

What if I can't sell my old house before the bridge loan is due?

You can ask the lender to extend the loan (for a fee and possibly a higher rate), refinance into a longer-term loan, or sell the house quickly at a lower price. If you can't do any of these, you risk foreclosure on one or both homes and serious damage to your credit.

Is a bridge loan the same as a home equity loan?

No. A home equity loan is a fixed-term loan (usually 5 to 15 years) with set monthly payments. A bridge loan is short-term (weeks to months) and is designed to be repaid in full when a specific event happens, like a home sale. Home equity loans typically have lower rates and longer repayment periods.

Do I need a real estate agent to use a bridge loan?

No, but a real estate agent can help you price your old house competitively so it sells faster, which reduces the time you're paying two mortgages. If you're selling without an agent, price aggressively and be ready to negotiate.

Can I use a bridge loan to buy an investment property?

Yes, some lenders offer bridge loans for investment properties, but rates are usually 1% to 2% higher than for primary residences. The lender will want proof that the property will generate income or that you have the cash flow to cover both the bridge loan and any existing mortgages.