A gap equity loan is a short-term loan, usually six to twelve months, that lets you borrow against the equity in your current home to fund the down payment and closing costs on a new one before the old house sells. Interest rates typically run 8% to 12%, monthly payments are usually interest-only, and the full principal comes due as a balloon payment once your current home closes. It exists to solve one problem: the cash you need for the next house is trapped in the one you still own.
How the Loan Works
You borrow a lump sum secured by a lien on your existing home, use the proceeds to close on the new property, and pay off the balance in full when your old home sells. During the loan term, most lenders require only monthly interest payments, so the principal sits untouched until the sale. Some lenders skip monthly payments entirely and let interest accrue onto the balance, which keeps cash flow easier but increases the payoff amount.
Because the loan is backed by real collateral in your existing home, underwriting focuses on the equity cushion more than on exhaustive income documentation. That’s why a gap equity loan can close faster than a conventional mortgage, which matters when you’re staring down a 30-day closing on the new house.
You may see the same product marketed as a bridge loan. In residential real estate the two terms are largely interchangeable: short duration, single disbursement, secured by the departing home, repaid from sale proceeds.
When It Makes Sense
The classic use case is finding the right next house before your current one has a buyer. Most of your wealth is locked in home equity that only turns liquid at a closing table, and a gap loan unlocks it early so you don’t have to wait.
The strategic value shows up in the offer itself. In a competitive market, an offer contingent on selling your current home is a weak offer. Sellers view it as risky because the deal depends on a transaction you don’t yet control. A gap equity loan lets you drop that contingency, so your offer looks much closer to a cash buyer’s. In a bidding war, that can be the difference between winning and losing the house.
The math works best when your current home sits in a strong market and is likely to sell quickly. If comparable homes are lingering for months, you’ll be paying interest the whole time yours is listed, and the carrying cost adds up fast.
What You Need to Qualify
Lenders look at two things: the property and you.
On the property, they focus on the loan-to-value ratio — the total debt secured against the home versus its appraised value. Most lenders want the combined LTV between 65% and 80%, which means you need at least 20% to 35% equity after accounting for both your existing mortgage and the gap loan.
Take a home appraised at $500,000 with $200,000 remaining on the mortgage. That’s $300,000 of equity. A lender comfortable at 80% LTV would approve a gap loan up to $200,000, bringing total debt against the property to $400,000. The remaining equity is the cushion that protects the lender if the sale comes in low.
On the borrower side, credit score minimums commonly start around 680, with better pricing at 700 and above. Debt-to-income thresholds tend to be more generous than a standard mortgage — some lenders allow DTI up to 50% because they know the bridge debt disappears at sale.
The factor that matters most is a credible exit strategy. Lenders want evidence your current home will sell within the loan term. A fully executed purchase contract on the existing home is ideal. Without one, a comparative market analysis showing strong demand and recent comparable sales can do the job. No convincing path to repayment, no loan, regardless of your credit or equity.
What It Costs
Gap equity loans are expensive relative to conventional mortgages, and the pricing reflects the speed and short-term risk the lender is absorbing. Interest rates generally range from 8% to 12% depending on your credit profile, equity position, and lender. Many bridge lenders price as a spread above the prime rate, which sat at 6.75% in early 2026.1Federal Reserve. Federal Reserve Board – H.15 – Selected Interest Rates (Daily)
Upfront costs stack on top of the rate:
- Origination fees of 0.5% to 2.0% of the loan amount. On a $150,000 loan, that’s $750 to $3,000 before you borrow a dollar.
- Appraisal fees of roughly $500 to $1,300 per property, and you may need appraisals on both homes.
- Title insurance, escrow charges, and recording fees, the same as any mortgage.
- Prepayment penalties at some lenders, typically 1% to 2% of the remaining balance. This one matters. The whole point of the loan is early repayment when the house sells, and a prepayment penalty turns the best-case outcome into an added cost. Ask before signing.
Repayment and the Balloon Payment
Nearly all gap equity loans are interest-only during the term. You cover accrued interest each month but make no dent in the principal. When your existing home sells, the net sale proceeds pay off the entire loan in one shot. That final payoff is the balloon payment.
The variation some lenders offer is a fully deferred structure with no monthly payments at all. Interest accrues and gets added to the principal, and everything comes due at sale. Cash flow is cleaner while you carry two homes, but the total owed at payoff is larger.
What Happens If Your Home Does Not Sell
This is the risk that defines the product. If the loan term expires and you still own the property, the full balloon payment is due whether or not the sale has happened. You are contractually obligated to repay the principal on schedule.
Your options at that point are narrow. Some lenders will grant an extension, usually with renewal fees and a higher rate for the extended period. If the lender won’t extend, you’d need alternative financing — a conventional refinance or home equity loan — to cover the balance. If you can’t secure either, the lender can initiate foreclosure on the property securing the loan.2Bankrate. What Is a Bridge Loan and How Does It Work
Even short of default, carrying two properties gets expensive fast. During the gap period you owe the new mortgage payment, the interest on the gap loan, and everything else the unsold home still costs you: property taxes, insurance, utilities, maintenance, HOA fees. Before signing, run the monthly cost of owning both homes and confirm you can sustain it for the full loan term, not just the timeline you’re hoping for.
There’s one less obvious risk. If the market softens and your existing home appraises below expectations at sale, the proceeds may not fully cover the gap loan balance. You’d need to bring additional funds to closing, which can blindside borrowers who assumed the sale would neatly retire the debt.
Is the Interest Tax-Deductible?
Interest on a gap equity loan may be deductible as home mortgage interest, but the conditions are specific. The IRS allows a deduction for interest on debt secured by your home when the borrowed funds are used to buy, build, or substantially improve a qualifying residence. A gap loan used for the down payment on a new primary home generally fits.3IRS. Publication 936 (2025), Home Mortgage Interest Deduction
Total deductible mortgage debt is capped at $750,000 for loans taken out after December 15, 2017 ($375,000 if married filing separately). The cap applies across all your qualifying mortgages combined, including the new home’s mortgage and the gap loan. Over the cap, only a portion of your interest is deductible.3IRS. Publication 936 (2025), Home Mortgage Interest Deduction
If any portion of the proceeds goes to something other than acquiring the new home, interest on that portion is not deductible. Keep records showing exactly how the funds were used.
Alternatives to Consider
A gap equity loan isn’t the only way to bridge the timing between buying and selling. Depending on your situation, one of these may cost less or carry less risk.
- An existing HELOC. If you already have a home equity line of credit in place, you can draw against it for the down payment without opening a new loan. Rates are typically lower than a bridge loan, but setup takes time — this works best when the HELOC was established before you started house-hunting.
- A traditional home equity loan. A lump sum against your equity at a fixed rate, similar to a gap loan but with a longer term and lower rate. Slower to close, longer commitment.
- Cash-out refinance. Replace your current mortgage with a larger one and pocket the difference. Rates are lower than bridge loans, but the process runs 30 to 45 days and you’re resetting the clock on a long-term mortgage.
- Contingent offer. Make your offer on the new home contingent on selling the old one. Sometimes acceptable in a slow market. In a competitive one, this puts you well behind non-contingent buyers.
- Sell first, rent temporarily. Sell the old house, pocket the equity, rent while you shop, and buy without timing pressure. Eliminates the financing risk entirely but adds moving costs, storage, and a second move.
Each alternative trades one form of cost or inconvenience for another. The gap equity loan’s advantage is speed and offer strength. Its disadvantage is price and the risk of carrying two homes longer than planned. The right pick depends on how competitive your purchase market is, how quickly your current home is likely to sell, and how much cushion you have if the timeline slips.