What is a bridge loan and how does it work when buying and selling?

A bridge loan is short-term financing that uses the equity in your current home to fund the purchase of a new one before your old home sells. It literally bridges the gap between two closings, giving you cash for a down payment on the new home while you wait for the old one to sell.

Bridge loans are most useful when your new home purchase closes before your current home does, which happens when a move-in-ready home appears before your own home sells. Without the bridge, you might have to make your purchase contingent on selling first.

In the Philadelphia market, the bridge often appears when a buyer finds a great home in a competitive area like the Main Line or Center City but still owns a home in the suburbs that has not yet found its buyer.

A bridge loan is typically secured by your current home, and you repay it with the proceeds once that home sells. The loan amount is based on the equity you have, often a percentage of your current home value, and it can be structured as a lump sum or a line of credit. Terms are short, usually up to a year.

Because the new home mortgage and the bridge loan both have payments, you temporarily carry two loans. That double-carry cost is the price of having cash available before your old home closes.

The mechanics depend on your lender policy on how equity is calculated: some use the current appraised value, others use a more conservative percentage, which is why the first step is a conversation with a lender who structures these regularly.

Bridge loans carry higher interest rates and fees than conventional mortgages, reflecting their short-term, higher-risk nature. You also face the risk that your current home takes longer to sell than planned, extending the period you are making payments on both properties. If the old home sells for less than expected, you may owe more than planned.

Before using a bridge loan, stress-test the plan: what happens if your current home does not sell within the bridge term? Knowing that answer before you borrow is part of using the tool responsibly.

Add up the true total before committing: the bridge interest, the origination and appraisal fees, and the possibility of paying two mortgages for several months. Only when that total is smaller than the cost of a contingent offer lost negotiating power does the bridge earn its keep.

A bridge loan is not the only way to handle the gap between buying and selling. A home equity line of credit on your current home can serve a similar purpose with more flexibility. A sale contingency on your offer lets you buy only after your home sells, at the cost of a weaker position with sellers. Some sellers will consider a delayed closing or rent-back arrangement instead.

Your agent can lay out the options that fit your market and your timeline. The right choice balances the cost of the bridge against the strength it gives your purchase offer.

A trade-in program can also eliminate the problem entirely by coordinating the sale and purchase as one transaction, which is why comparing your options before choosing a bridge is the smarter first step.