You may have never heard of a bridge loan before and that is probably because the housing market has been doing well for so long that most people haven't needed them as homes sold within days of being listed. Homeowners did not have to worry about paying for their new homes before they'd sold the old ones.  But in recent times, the housing market slowdown has given the bridge loan a boost in popularity.

What is a Bridge Loan?

Bridge loans are temporary loans to cover the difference between the sales price of a new home and a home buyer's new mortgage if the old home hasn’t sold. The bridge loan is secured to the buyer's existing home. The loan is  then used as a down payment on the new home, helping the homeowner to bridge the gap between buying and selling a home.

There are two types of bridge loans. The first pays off the mortgage on your current home and makes a down payment on the new one. This means that you pay the mortgage only on the new property, agreeing to repay the bridge loan when the old home sells.

The second type of bridge loan is more risky, allowing you to borrow against the equity of the current home to use for your down payment. The scary part is that while you're paying off a bridge loan, you're still responsible for the mortgage payments on both homes.

Pros and Cons:

The Pros
• You can immediately put your house on the market.
• Bridge loans often have a grace period, without payments, for a few months.
• If the buyer has made a contingency offer  to buy and the seller issues a Notice to Perform, forcing the buyers hand,  the buyer can move forward still move forward with the purchase without the contingency.
• It allows you to get your new home without the stress of waiting on the sale of your old one.

 The Cons
• Bridge loans cost more than home equity loans.
• Buyers will be qualified by the lender to own two homes and many buyers cannot qualify for this.
• You will essentially have two mortgage payments PLUS interest.   Not the best situation for the long term.

Although there are cons that need to be considered with this type of loan as well as other short-term mortgage financing, they may be necessary when home buyers land in tight spot. Do your research and check with your mortgage consultant to explore the options that work best for your situation.