What is a Swing Loan in Real Estate and How Can it Help You Buy or Sell a Home?

Buying or selling a home can be an exciting yet stressful time You likely want to move quickly to get into your new place or sell your current one But the logistics of buying and selling at the same time can get tricky. This is where a swing loan can help.

A swing loan, also known as a bridge loan, is a short-term financing option that helps you buy a new home before selling your current one. It acts as a bridge between the two transactions Swing loans give you flexibility and options when navigating the home buying and selling process

In this article, we’ll explain what a swing loan is, how it works, and when you may want to use one. We’ll also provide tips for getting a swing loan and compare it to alternatives like home equity loans. Read on to learn how a swing loan can benefit you when buying or selling real estate.

What Is a Swing Loan?

A swing loan is a short-term mortgage loan that lets you buy a new house before selling your existing home. It’s secured by the equity in your current home. Swing loans are also known as bridge loans or swing loans because they “bridge the gap” between transactions.

With a swing loan, you can make a non-contingent offer on a new home without having to sell your current house first. This gives you a competitive edge compared to contingent offers, which can fall through if the buyer fails to sell their old house. Sellers often prefer non-contingent offers.

The loan term on a swing loan is typically 6 months to 1 year. This gives you enough time to purchase the new home, move in, and sell the old house. Once you sell your current home, you can pay off the swing loan with the sale proceeds.

Swing loans work similarly to other types of mortgages in that you borrow against the equity in your home. But they are considered specialty financing rather than traditional mortgages. The loan terms are shorter and interest rates tend to be higher.

How Does a Swing Loan Work?

When applying for a swing loan, the lender will assess your finances just like with a regular mortgage:

• Credit score: Swing loan lenders often require credit scores of 720 or higher.

• Debt-to-income ratio: Your total monthly debt payments, including the swing loan payment, typically cannot exceed 50% of your gross monthly income.

• Home equity: Most lenders require at least 20% equity in your current home. Some may go as high as 25-30%.

If approved, you can use the swing loan to purchase the new home. Here are two ways swing loans are typically structured:

• Piggyback loan: The swing loan is a second mortgage you place on top of the existing mortgage on your current home. You tap the equity to use as a down payment on the new home.

• Single new loan: You take out one large swing loan that pays off the old mortgage. The remainder covers a down payment on the new home.

With a swing loan, you’ll make monthly interest-only payments to the lender, typically for the 6 month to 1 year term. Some lenders may offer deferred payments for the first few months.

Once you sell the old house, you repay the swing loan in full with proceeds from the sale. You can then obtain permanent financing for the new home, such as a traditional 30-year fixed-rate mortgage.

When Do You Need a Swing Loan?

There are a few situations where a swing loan can come in handy:

• Buying in a seller’s market: When home inventory is low, sellers won’t accept contingent offers. A swing loan allows you to make a competitive, non-contingent offer.

• Securing a home quickly: If you need to move fast for a new job or family situation, a swing loan lets you buy right away.

• Avoiding overlapping moves: If closing dates don’t line up, you can use a swing loan to buy the new home first and avoid paying two mortgages at once.

• Short on cash: A swing loan provides funds for the down payment if you don’t have enough cash on hand.

• Investing in real estate: Investors can use swing loans to quickly capitalize on a promising investment property.

A swing loan gives flexibility when timing is critical. You don’t have to wait to sell before buying new.

What Are the Pros and Cons of Swing Loans?

Swing loans offer advantages but also come with risks to weigh. Here are the key pros and cons:

Pros:

• Make a non-contingent offer to compete against other buyers
• Buy a home quickly without having to sell first
• Avoid overlapping mortgage payments
• Tap home equity without waiting to sell
• Typically fast approval and funding

Cons:

• Higher interest rates than traditional mortgages
• Risk of paying two mortgages if old home doesn’t sell
• Monthly payments strain the budget
• Loan fees and closing costs
• Lower borrowing limits than home equity loan

The short duration can benefit you but also presents risks if your home doesn’t sell within the term. Carefully consider your budget and the housing market before getting a swing loan.

What Are the Interest Rates and Fees?

Swing loans typically have higher interest rates than standard mortgages:

• Interest rates: Expect rates 2-3% above the prime rate, currently around 7-9% APR.

• Origination fee: Up to 2% of the loan amount.

• Other fees: Appraisal fee, application fee, title fees, and other closing costs.

• Total costs: Usually $2,000 – $5,000.

Always compare offers from multiple swing loan lenders. Ask about their rates, terms, fees, and prepayment policies to find the most affordable option.

Tips for Getting a Swing Loan

If you think a swing loan may help your home purchase, here are some tips:

• Talk to your existing mortgage lender first—they often offer swing loans.

• Shop around with multiple lenders to compare costs.

• Get pre-approved so you know your borrowing power.

• Ask about rate locks to avoid interest rate hikes before closing.

• Understand the risks if your home doesn’t sell within the term.

• Closely evaluate your budget to ensure you can afford both mortgage payments.

• Check your home equity—you typically need 20-30% equity to qualify.

• Consult a real estate agent to assess the market and estimate your home’s sale price.

Doing your homework can help ensure a swing loan runs smoothly and safely bridges your transactions.

Alternatives to Swing Loans

Swing loans aren’t your only option for financing the transition between selling and buying. Two alternatives to consider are:

Home Equity Loan

With a home equity loan, you borrow against existing home equity and pay it back over 5-20 years. The longer term gives you more time to repay compared to a swing loan. Interest rates are also lower than swing loans but higher than first mortgages.

Home Equity Line of Credit (HELOC)

A HELOC functions like a credit card with your home as the collateral. You can draw from the line of credit as needed. HELOCs have variable interest rates but offer greater flexibility to repay over time. Keep in mind that HELOC limits are often lower than swing loans.

Be sure to compare all your options before choosing the best home financing solution for your needs!

The Bottom Line

Navigating the transition between selling your current home and buying a new one can get tricky. But a swing loan simplifies the process by letting you buy right away without having to sell first.

Also known as a bridge loan, a swing loan is a short-term financing option secured against your existing home’s equity. While costs are higher than traditional mortgages, a swing loan allows you to make competitive offers and move quickly. It acts as a bridge as you transition between homes.

Carefully weigh the benefits and risks before getting a swing loan. And be sure you can afford both mortgage payments if your home sells slower than expected. With the right planning, a swing loan can be a valuable tool to help you buy or sell with ease.