How to Pay Off a Bridge Loan: The Exit Plan, Explained

Most people shopping for a bridge loan ask the wrong first question. They ask how much they can borrow. The better question is how the loan ends.

A bridge loan is short-term by design. It lets you use the equity in the home you own to buy your next home before the first one sells. That only works if everyone agrees, up front, on what pays it off and when. That's the exit plan, and it's the part of a bridge loan worth the most planning.

What a bridge loan exit actually is

The exit is the event that pays the bridge loan back. For homeowners buying before they sell, there are really only two.

• The sale of your current home. You close on the new house, move, list the old one, and the sale proceeds pay off the bridge.
• A sale plus a new mortgage. The sale pays the bridge down, and whatever is left moves into a regular mortgage on the new home.

Which one fits you depends on how much equity you have in the departing home, the price of the next one, and the monthly payment you want to live with afterward.

Exit one: the sale pays it off

This is the simplest version. The bridge covers what you need to buy the next home, you sell the old one on your own schedule, and the payoff comes out of your closing proceeds at the sale.

It works best when the departing home carries enough equity to cover the bridge with room to spare, and you plan to own the new home free and clear or with the financing you already set up at purchase.

Exit two: the sale pays it down, a mortgage takes the rest

Plenty of buyers don't want all of their equity tied up in the new house. In that case the sale pays the bridge down, and the remaining balance becomes a standard mortgage on the new home.

Done well, the payoff and the new mortgage are coordinated so you're never carrying both longer than you need to. It's worth asking your lender at application, not after you've moved, what that mortgage would look like.

How long it usually takes

Across the 43 buy-before-you-sell bridge loans our clients have paid off, the median time from funding to payoff was 59 days. The middle half paid off between 37 and 78 days. Our bridge loans carry a 12-month term and no prepayment penalty, so a slower sale doesn't force your hand, but most people are out well before that.

Questions to ask before you take a bridge loan

1. What pays this loan off? You should be able to answer in one sentence.
2. What happens if my home takes longer to sell than I expect? Know the term before you need it.
3. If I'll need a mortgage on the new home afterward, what does it look like? Ask before you write the offer.
4. Is there a prepayment penalty? You want to be able to pay it off the day your sale closes.
5. Who funds the loan? The company you're talking to, or someone they send it to?

The takeaway

The bridge is the easy part. The exit is where the planning goes. If you know what pays the loan off and roughly when, buying before you sell stops feeling like a gamble and starts feeling like a sequence.

If you're thinking about buying your next home in Connecticut before you sell the one you're in, the team at AFC Mortgage Group can walk you through both exits with your real numbers. Learn more at afcmortgagegroup.net/bridge-loans.