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Bridge Loan vs Home Equity Loan
Discover the differences between a bridge loan vs home equity loan and which is the best choice for your needs.
As your life changes, whether it’s the addition of children, a new job, or an early retirement, your housing requirements change as well.
Suddenly, your vision of your ideal home changes, and it’s time to sell your current home and get a new one.
Navigating this process can be challenging, even more so if you find your ideal next house before your current one has a chance to sell.
This is why you should consider comparing short-term credit solutions.
When it comes to the bridge loan vs home equity loan debate, the route you take is determined by the interest rates available to you and the purpose for which you require the funds.
Both forms of loans can be used to assist pay for a second mortgage if you need to pay for a mortgage on both your new and existing house while you look for a buyer.
To better grasp the distinction between a home equity loan and a bridge loan, continue reading for a discussion of the two borrowing choices.
How Does a Bridge Loan Work?
Term 3 – 6 months
Conditions: Collateral is required
Interest rates are typically between 8.5 percent and 10.5 percent.
A bridge equity loan provides assistance when a borrower requires access to capital to “tide them over” during a transitional time.
These loans are frequently used to provide a financial cushion for consumers who are simultaneously buying and selling a home.
Bridge loans are often small in size, averaging around 3% of the purchase price of the new property you’re purchasing.
Bridge loans are a risky investment for lenders, as there is a possibility that you will not sell your new home and will struggle to repay the loan.
As a result, bridge loans often have somewhat higher interest rates than 30-year fixed rate loans – ranging from 8.5 percent to 10.5 percent.
To assist offset their risk, these loans may also include additional fees and require collateral in the form of your home.
Take care here, if you default on your loan payments and your home serves as security, the lender may foreclose on your home.
Lenders will consider your present mortgage obligations and any other debts you may have, as well as your daily financial obligations, in order to determine your likelihood of repaying your loan.
You typically have the option of adhering to a defined monthly repayment schedule or repaying the entire balance immediately upon the sale of your house if you used the bridge loan to cover the expense of balancing two mortgages concurrently.
You typically have six months to three years to repay your bridge loan (including interest), with the deadline typically coincident with the sale of your previous house.
Having said that, it’s difficult to predict how long it will take to sell your home. If your home does not sell by the deadline for repaying your loan in full, you may seek for an extension.
Benefits of Bridge Loans
A bridge loan for home buying is a short-term loan intended to tide individuals over until they can acquire a more permanent manner of financing a home.
Not everyone qualifies for a bridge loan, and interest rates on bridge loans can be significantly higher than on conventional 30-year mortgages.
Homeowners who have bridge loans must make those payments in addition to their monthly mortgage payment.
Protected by the Property You Own
Bridge loans are secured by your existing property. Lenders will guarantee your payments by securing your home with a lien.
For those in poor financial conditions, a bridge loan may be a more viable choice than an unsecured personal loan.
Assists You in Purchasing a New Home
Bridge loans are often relatively tiny, typically less than 3% of the buying price of the new property.
A significant advantage is that you can apply for this form of home loan while your current residence is on the market.
A bridge loan for home buying might provide you with the funds necessary to make the acquisition. Then, once you’ve closed on your new property, you can repay the loan.
Term Decreased
Bridge loans often have a length of six months to three years, depending on the lender’s requirements.
This means that you are less likely to struggle to repay the loan because your short-term future is more defined.
No homeowner wants to take out an additional line of credit only to realize that it will be impossible to repay due to an unforeseen event.
Various Repayment Options
You may not even be required to make monthly payments until your house is sold.
As a general rule, bridge loans are due when the previous house is sold, together with any accrued interest.
As with any loan, it is critical to take time researching the lender’s terms of the bridge loan to ensure that you are entirely happy with the process.
Bridge loans can be extended if your house does not sell over the life of the loan, providing some respite in a challenging real estate market.
If you’re still on the fence about whether a bridge loan or a home equity loan is a better fit for your circumstances, continue reading as we discuss home equity loans next.
How does a home equity loan work?
Duration: 5 – 20 years
Conditions: Requires collateral and application prior to listing your home.
Interest rates are typically between 5% and 6%.
A home equity loan, like a bridge loan, uses your property as collateral, but unlike a bridge loan, you must obtain a home equity loan before putting your home on the market for sale.
While planning ahead for a home equity loan is important, the benefits may very well be worth it.
Home equity loans frequently feature lower interest rates and costs than bridge loans.
It can be difficult to qualify for a home equity loan if your credit history is less than stellar, but when you use your home as collateral, lenders feel more secure making the loan.
While bridge loans are normally due once your primary residence sells, a home equity loan can be used even after your primary residence sells.
This is advantageous if you have a large number of post-sale expenses to address, such as hiring movers or purchasing furnishings.
Home equity loans are longer-term loans with repayment terms ranging from five to twenty years.
While home equity loans often have lower interest rates than bridge loans (about 5%–6%), if you take many years to repay the loan, the interest will almost certainly be more than with a short-term bridge loan.
A home equity loan is invaluable when you need to balance the purchase of a new house with the sale of your current one, but this is not a risk-free borrowing choice.
If you are unable to sell your primary residence, you may find yourself responsible for your primary mortgage, new mortgage, and home equity loan all at the same time.
When are these loans a good idea?
Moving is difficult under the best of circumstances. This is especially true if you need to meet all of your current house’s financial obligations while navigating a move to a new home, which comes with its own expenses. Even reaching that stage entails financial pressure.
Both bridge loans and home equity loans can assist in providing the finances necessary to purchase a property while attempting to sell an existing one.
In a perfect scenario, your current residence would sell before you close on your new residence.
However, let us acknowledge that even the savviest real estate agent cannot ensure that this will occur.
As beneficial as bridge loans and home equity loans can be, they do carry some risk.
If possible, taking out a bridge loan to cover moving fees or the final few months of your mortgage before escrow closes is a safer course of action, as you will already know that your home has sold.
Additional financing options available to home buyers
Regardless of where you are in the house selling or purchasing process, you have a choice of financial options to assist make the process less stressful.
Loans to individuals
Because both bridge loans and home equity loans are secured by your home, they are easier to obtain at a favorable interest rate even if your credit score is less than ideal.
Consider a personal loan if your credit is in good standing and you can acquire one at a reasonable interest rate.
A personal loan may be a safer option to borrow money, as your home is not at risk if your house does not sell as quickly as you planned.
Credit card with 0% APR
A credit card with an introductory 0% APR rate operates as a “free” method of financing if, and only if, you can repay the loan before the promotional period expires and your interest rate increases.
While this is a hazardous bet if you have not yet sold your home, if you only require assistance with moving fees or critical home purchases, a credit card with a low or zero percent annual percentage rate is an excellent option for short-term borrowing.
Sell with a Contingency in Place
There are several different house sale contingencies that sellers can utilize to streamline the home selling process.
If you opt to sell your home with a “home of choice” contingency, you can condition the sale of your current property on your finding a new one to purchase.
This enables you to sell your home while you continue your search for a new one.
Such a contingency simplifies the procedure for the seller and is a viable choice in a seller’s market with high competition for homes.
Additionally, you can sell your home to a buyer who accepts a “rent back” contingency.
This sort of contingency permits you to proceed with the sale of a home while retaining the right to rent the property back from the buyer for an agreed-upon period of time while you search for a new home to purchase.
Either of these conditions streamlines the house seller’s procedure and helps you eliminate the need for financing, but they are easier to achieve in a seller’s market because buyers are eager to make the best offer possible.
Advantages of Home Equity Loans
Another sort of loan is a home equity loan, which uses the equity in your property as collateral.
These are more prevalent loans for homeowners since lenders are more prepared to take a chance on borrowers who have accumulated equity.
However, a significant distinction between home equity and bridge loans is that home equity loans must be secured prior to listing your home.
You must plan ahead if you intend to remove one of these. If you are able to, there are numerous advantages.
Discounted Rates and Fees
In comparison to bridge lines of credit, home equity loans frequently feature cheaper interest rates and less fees.
Additionally, you can add points to the loan, which can save you even more money in the long run.
Unfortunately, many people are unable to obtain these types of loans due to their credit score, credit history, or other issues.
Can Be Used for Additional Purposes
While bridge loans are typically payable when your present property sells, what if you require more funds to pay off other debts?
If you have high-interest credit card debt, medical bills, or student loans that you wish to repay, home equity loans will enable you to make prudent financial decisions.
Independent business owners frequently benefit from this type of loan because the funds enable them to expand their operations.
Future Funding Availability
A home equity line of credit (HELOC), one sort of home equity loan, operates similarly to a credit card.
You do not receive the loan in one big sum; rather, you borrow up to the loan’s predetermined maximum amount.
With this form of loan, regardless of when your home sells, you can use the money for whatever purpose you like.
When relocating, this may entail financing any necessary upgrades or repairs.
Bridge Loan vs Home Equity Loan Bottom Line
Whether you employ a home equity line of credit or a bridge loan for short-term financing in a real estate transaction is situation- and qualification-dependent.
Additionally, it is contingent upon the terms of each source of funding. You may wish to see a financial professional to assist you in determining which loan is the best fit for you.