What is a swing loan in real estate?

When navigating the complex world of real estate, homeowners often face the challenge of coordinating the sale of their current home with the purchase of a new one. In real estate, a swing loan, also known as a bridge loan, offers a solution to bridge the gap between buying and selling properties. This blog will delve into what swing loans are, how they work, and their benefits and drawbacks while answering key questions related to swing options in term loans and swing-line loans.

What is a swing loan?

A swing loan in real estate is a short-term loan designed to provide temporary financing during the transition between selling one home and buying another. This type of loan allows homeowners to access the home equity in their current home to fund the purchase of a new home. Swing loans can be especially useful when a homeowner has found a new home to buy but hasn’t yet sold their current property.

What is a swing option in a term loan?

A swing option in a term loan provides flexibility by allowing the borrower to access funds as needed within a set limit. This works similarly to a line of credit, where the borrower can “swing” the loan balance up or down based on cash flow requirements. This option is beneficial for managing short-term financial needs without having to renegotiate the entire loan each time additional funds are needed.

How does a swing-line loan work?

A swing line loan is a specific type of credit facility that functions as a sub-limit of a larger revolving credit facility or syndicated loan. Here’s how it works:

• Availability. Provides immediate, short-term liquidity for temporary cash flow needs.
• Purpose. Used for managing day-to-day operational expenses or bridging timing gaps in financing.
• Drawdowns. Allows quick access to funds, which must be repaid within a short period.
• Limits and terms. The available amount is typically a fraction of the total credit facility, often with higher interest rates due to the short-term nature of the loan.
• Repayment. Requires prompt repayment, usually within a few days or weeks.

What is an example of a bridge finance?

Consider Sarah, a homeowner who wants to purchase a new home for $500,000 but hasn’t sold her current home, valued at $400,000. She needs $100,000 for the down payment but lacks liquid cash. By obtaining a bridge loan for $100,000, using her current home as collateral, Sarah can cover the down payment for the new home. Once her current home sells, she can use the proceeds to repay the bridge loan.

Benefits of swing loans

A swing loan in real estate offers several advantages for homeowners:

• Immediate cash flow. Provides quick access to funds for purchasing a new home.
• Flexibility. Allows homeowners to buy a new property without waiting for the sale of their current home.
• Smooth transition. Facilitates a seamless move between homes without the need for temporary housing.

Drawbacks and cons of bridge loans

While swing loans can be beneficial, they also come with certain drawbacks:

• Higher interest rates. Swing loans often have higher interest rates compared to traditional mortgages.
• High costs. In addition to higher interest rates, there may be additional fees and closing costs associated with the loan.
• Risk of unsold property. If the current home doesn’t sell within the loan term, the borrower may face financial strain.
• Short repayment period. The short-term loan requires quick repayment, which can be challenging.

Qualifying for a bridge loan

To qualify for a bridge loan, borrowers typically need:

• Good credit score. Lenders prefer borrowers with a solid credit history.
• Sufficient home equity in your current home. The current home’s equity is often used as collateral.
• Low Debt to Income (DTI) Ratios. A low DTI ratio indicates the borrower’s ability to manage additional debt.

Read more: Wow to pick a home loan lender?

Bottom line

Finally, a swing loan, or bridge loan, are valuable tool for homeowners navigating the complexities of buying and selling properties. They provide the necessary flexibility and immediate cash flow to bridge the gap between the sale of your current home and the purchase of a new one. However, it’s essential to consider the higher interest rates, short repayment terms, and other potential drawbacks. In summary, by understanding how a bridge loan works and evaluating your financial situation, you can determine if this short-term loan option is right for you.

Written by Vanessa Gallanti. February 6, 2025

Enthusiast about planning, project management, construction materials and technology, and construction. A civil engineer from Los Andes University and a content writer for Kukun.