Bridge Loan

A “Bridge Loan” allows a borrower to use the equity in their existing primary residence to close on the purchase of a new primary residence before the closing of the existing home. The Bridge Loan will be secured by a first or second mortgage on the existing primary residence. The maximum amount of any bridge loan is usually limited to the lesser of the actual amount needed to close on the new home purchase.

Most lenders will require that the current primary residence be listed for sale or under contract in order for the borrowers to be eligible for the loan. A bridge loan usually has a maximum term of 6 months; however, the loan must be paid off in full if the current residence is sold sooner.

There are normally no monthly principal and interest payments required during the term of the loan. Bridge Loans are non-amortizing loans which are payable in full at the end of their terms. This means that if you are approved for a Bridge Loan, you will be required to pay the entire principal balance of the loan and any unpaid interest at the end of the loan term.

The interest rate on bridge loans will usually a the Prime Lending Rate plus a margin (e.g., Prime + 2%) on the day the closing documents are prepared.

Assume, for example, that you are approved for a Bridge Loan in the amount of $50,000 and the loan is scheduled to close on June 16 th of a given year. Also assume that the Prime loan rate on the date of closing is 6.75%. In such a case the interest rate on the loan would be 8.75% (i.e., 6.75% plus 2% equals 8.75%).