Bridge Loans vs. Home Equity Loans: Which Should You Choose?
Moving is overwhelming enough, even before the costs begin to add up. You have to pay for packing supplies and a moving company. Pets need boarding, and you may even need to rent storage space. Money is tight, and the transition can be anything but smooth.
Even if it’s just next door, moving can be extremely expensive. It’s stressful—and sometimes impossible—to get the down payment for a new home when you still have your current home on the market.
No real estate agent can guarantee your old home will sell before you want to close on your new home, but few homeowners have the cash available to support two mortgage payments. This is where you might be trying to decide if a bridge loan vs. home equity loan might be better for you.
Both of these home loan types are considered short-term financing options that will carry you forward to your new home. Let’s take a look at the pros and cons of bridge loans vs. home equity loans.
We’ll also explore other funding options available that will allow you the flexibility and breathing room you need to underwrite your plans while taking the stress out of your living situation.
Bridge Loan Advantages
A bridge line of credit for home purchase is a temporary loan designed to help “tide over” individuals until they can secure a more permanent method of financing a home. Not everyone will qualify for a bridge loan, and the interest rates can be substantially higher than traditional 30-year mortgages. Homeowners who have bridge loans have to pay those payments as well as the monthly payment on their mortgage.
Secured by Property You Own
Bridge loans use your existing property as collateral. Lenders will guarantee your payments by placing a lien on your home. Sometimes, a bridge loan is a more realistic option than an unsecured personal loan for those in difficult financial situations.
Helps You Purchase a New Home
Bridge loans are usually very small, around three percent of the purchase price of your new home. A major benefit is that you can apply for this type of home loan while your current house is listed. A bridge loan for home purchase can give you the money you need to buy. Then you can pay it off once you close on your new home.
Bridge loans normally have a term of between six months and three years depending on the terms set by the lender. This means that you are less likely to struggle to repay the loan because you have a clearer picture of your short-term future. No homeowner wants to take out an additional line of credit only to discover an unforeseen circumstance making it difficult to repay.
Different Repayment Options
It’s possible that you may not even have to pay monthly payments until your home is sold. As a general rule, bridge loans are due when the old home is sold, along with any interest that has built up along the way.
Like all loans, it is important to spend time reviewing a bridge loan’s terms from the lender so that you are completely comfortable with the process. Bridge loans can be extended if your home does not sell within the loan’s term, offering some relief in a difficult real estate market.
If you are still wondering whether a bridge loan vs. home equity loan is better suited for your needs, keep reading as we dive into home equity loans next.
Home Equity Loan Advantages
A home equity loan is another type of loan that uses the equity in your home as collateral. These are more common loans for homeowners—more lenders are willing to take a risk on borrowers who have built up equity.
However, a big difference between home equity and bridge loans is that home equity loans must be secured before your home goes on the market. You need to think ahead if you plan on taking out one of these. If you’re able to, there can be many benefits.
Lower Rates and Fees
Compared to bridge lines of credit, home equity loan rates are often much lower when it comes to interest rates and have fewer fees. You can also pay additional points to the loan, so in the long run it can save you even more money. One unfortunate problem is that many people cannot qualify for these types of loans due to their credit score, history, or other factors.
Can Be Used for Other Needs
Bridge loans are usually due when your current property sells, but what if you still need the cash for other debts? Home equity loans will allow you to make smart financial decisions if you have high-interest rate credit card debt, medical bills, or student loans that you wish to repay. Independent business owners often benefit from this type of loan, as the funds can help them grow their business.
Access to Funds in the Future
One type of home equity loan called a home equity line of credit (HELOC) acts much like a credit card. You do not receive the lump sum of the loan at once—instead, you borrow against the predetermined maximum loan amount.
With this type of loan, regardless of when your home sells, you’re able to tap into this cash for whatever you need. When you are moving homes, this can mean financing some much-needed renovations or repairs. Bridge loans and HELOCs are some of the ways you can access your home equity. Compare bridge loans vs HELOCs to decide which is best for you.
Another Option: Sale-Leaseback Programs
A sale-leaseback program is an alternative for those who can’t or don’t want to get a bridge loan vs. home equity loan. Homeowners can sell their current home, and then they can continue to live in their single-family home, condo, or apartment as a renter.
A sale-leaseback solution can help provide money for a down payment without having to pay the high rates of a bridge loan or meet the requirements of a home equity loan. It offers the freedom of a stress-free move.
Moving is overwhelming enough, even before the costs begin to add up. There are options for you to fund your move that does not include stressful situations. If you are still unsure of whether w bridge loan vs. home equity loan or alternative options are right for you, after reading this article, consult a financial advisor to discuss your options.