Bridge Loan vs. Home Equity Loan: Which Is Right For You?
Moving is stressful enough. Find out how you can afford the closing costs on a new property before selling your old one.
Moving is stressful enough. If you’re trying to buy a new home before your current one sells, however, it can be downright overwhelming. How are you supposed to afford the closing costs on a new property when you haven't sold your old one?
As a homeowner, you have a few options at your fingertips—bridge loans and home equity loans. These short-term financing solutions can help you cover the cost of buying a new house while you wait for the sale of your current one. The question is, which one is the best choice for you?
Bridge Loan vs. Home Equity Loan: What Are They?
Before you decide on a short-term financing solution, let’s first take a look at bridge loans and home equity loans:
Aptly named, a bridge loan is meant to “bridge the gap” between the purchase of your new house and the sale of your previous one. It’s a very short-term loan, with average terms ranging between six months and three years. It’s essentially a financial cushion in case your old home doesn’t sell quickly. You don’t typically get a lot with this type of loan. In most cases, it amounts to approximately 3 percent of the purchase price of your new property.
Home Equity Loan
A home equity loan is a type of loan that allows you to tap into the equity you’ve accumulated in your home. The longer you’ve been making payments on your mortgage, the more equity you’re likely to have. While you typically can’t tap into the entire amount, you can generally get upwards of 80 to 85 percent.
Home equity loans are a more well-known form of financing. While their primary function isn’t to make a down payment on a new home, that is one way you can use the funds if you choose. Loan terms are longer than those attached to a bridge loan, ranging from five to twenty years.
Pros and Cons of a Bridge Loan vs. Home Equity Loan
Now let’s take a quick look at the pros and cons of a bridge loan vs. a home equity loan:
Pros of a bridge loan include:
- You get fast access to funds to make a down payment. Rather than waiting for your first home to sell before you buy another one, a bridge loan gives you the ability to buy while you’re in the process of selling.
- Short loan terms. No matter how much you plan, you can’t predict the future. Shorter loan terms mean you’re less likely to run into a situation where you can’t pay back what you borrow.
- You may not have to repay your loan right away. Generally speaking, you might not have to repay your bridge loan (plus accumulated interest) until your first house sells. You may also be able to get an extension if you can’t sell your home before the end of the original term.
Cons of a bridge loan include:
- Higher interest rates. Bridge loans are typically riskier for lenders since there’s a chance your house might not sell. Therefore, you may have to pay a higher interest rate (somewhere between 8.5 and 10.5 percent).
- You may have additional fees. Along with a higher interest rate, your lender may charge additional fees to offset their risk.
- Your home acts as collateral. You have to use your house as collateral, which means you could go into foreclosure if you can’t repay your loan.
Home Equity Loan
Pros of a home equity loan include:
- Lower interest rates. Compared to a bridge loan, a home equity loan has a much lower interest rate. It also comes with lower fees.
- Longer repayment terms. Longer repayment terms mean lower monthly payments.
- You can use the funds for other purposes. You can use a home equity loan for almost anything. If you have any money left over, you can use it to make home repairs, consolidate debt, cover moving costs, and more.
Cons of a home equity loan include:
- You may have to pay three loans if your home doesn’t sell. A home equity loan is often called a second mortgage. If you can’t sell your first home, you’re stuck paying your original mortgage, your home equity loan, and the mortgage for your new home.
- You have to have equity in your home. If you’ve only been paying on your original mortgage for a few years, you might not have as much equity as you need.
- Your home acts as collateral. If you fail to make payments, you could lose your home.
Who Are They For?
Bridge loans and home equity loans have somewhat different requirements:
Bridge loan requirements vary from one lender to the next. In general, you may need to meet the following qualifications:
- Good to excellent credit
- A low debt-to-income ratio
- At least some equity in your home (varies by lender)
Home Equity Loan
If you choose to use a home equity loan, you’ll need to meet your lender’s requirements, too. These requirements generally include:
- At least 15 to 20 percent equity in your current home
- A credit score in the mid-600s or higher
- A debt-to-income ratio of 43 percent or less
- A history of on-time payments
- Sufficient income to repay your loan
Convert your Home Equity to Cash
Determining the Right Choice for You
So, which one is the right solution for you? A bridge loan is an excellent solution if you need the funds quickly. It may also be ideal if you’re looking for something you can pay off in just a few months.
If you’re looking for something that comes with a lower interest rate or longer repayment terms, you might opt for a home equity loan. You might also go this route if you want to use the equity in your home to make home improvements before you sell or cover the cost of your moving expenses.
Bridge Loan vs. Home Equity Loan: What if Neither Option Makes Sense?
If you’re looking to buy a new home before selling your current one, a bridge loan or a home equity loan can help you achieve that goal. Understanding the differences between the two can make your decision easier, allowing you to make the best financial decision possible.
But what if neither solution makes sense for you? Don't worry; you have alternatives. One such option is EasyKnock. Using EasyKnock, we buy your home and you convert your home equity fast. You can continue to live in your home as a renter while you search for your next one. Once you find your perfect house, you can use the funds to make a down payment and move. It can be a much less stressful option that doesn't involve taking out any additional loans.
If you’ve decided that neither a bridge loan nor a home equity loan is the right solution, EasyKnock can help. Contact us today to learn more.
Amanda HoeyContent Marketing Manager
Amanda Hoey, Content Marketing Manager for EasyKnock, has applied her experience in public relations and content development to help produce educational and informative content for the financial and real estate industry. She is committed to bringing awareness and knowledge to homeowners about EasyKnock’s home equity loan alternative.