Often buyers will want to buy a home without first selling their home. This allows them to take their time moving and preparing their current home for sale. Perhaps it would even show better without them in it. Also potentially it may eliminate the need for a double move. The solution to this could be a bridge loan.

What is a bridge loan and how does it work?

A bridge loan takes some or all of the equity out of your current home and allows you to use it as a down payment on your next home. Generally this loan would be recorded as a second against your current home and sometimes the new home as well.. Terms for this type of loan vary however generally it is a 6-month loan that has a minimum of up front costs at an interest rate a point or two above the prime rate. Often the bank will require interest only payments on this bridge loan and sometimes they may just let the interest accrue until the loan is paid off from the sale of the home. These loans must be paid off within a short time, generally 6 months. Since this is a short-term loan, the interest rate on this is less important than the up front fees that the lender will charge to make this loan. Ideally you want little or no up front cost to obtain this loan. The lender will require an appraisal on your home to verify that your current home is worth what you believe it is.

How do you qualify for this type of loan? You will need to be able to qualify for the loan on your new home, plus the loan on your existing home, the bridge loan and any other existing debt you may have (car payments, VISA, Master Charge).

Lending guidelines have loosened enough that it has become much easier to get approved for this type of loan. Even if you can qualify, keep in mind that you will have to make all those payments until your home sells. If you home will sell quickly it may work out well but if it doesn't it can be painful to make those payments for an extended period of time.

Be sure to talk to your Realtor to get a realistic time frame for the sale of the home and what if any work should be done to prepare it for sale. Ask you Realtor to be candid about the time of the year you are marketing in, the price range you are in, the competition your home faces from other homes on the market and any improvements that should be made to the home. Today's market in general is not moving quite as quickly as the last few years due to a larger number of homes available on the market. Also there is less demand and more choices for homes in higher price ranges. Generally the people that would be in a position to consider a bridge loan as an alternative would have a more expensive home to sell.

Don't discount the advice that your Realtor has given you. As sellers you are emotionally attached to your home and it is easy to discount professional advice because you want the situation to fit a picture you have in your head. You have the luxury of doing this when you live in the home and have no pressure to sell. It will get old quickly when you are caring for two homes and making both house payments and the bridge loan payments.

After you have looked at the entire picture carefully it can make sense to discount the price of the home to have a better chance of selling it quickly. The peace of mind of mind this will bring may be a relief to the continuing monthly concern of meeting the debt obligation.

Carefully look at the other assets that you have to see if you have any alternative to a bridge loan, if you have enough cash saving in the bank, that is the best way to go. Do you have rentals or stocks that you can borrow against? Perhaps you can borrow against your 401 K plan. It would be a terrible idea to liquidate a retirement plan.

By carefully thinking through your options you can see which way is the best alternative for you as you purchase a new home.