When you’re leaving your old home behind for a new one, covering all your expenses can seem nearly impossible. But some options can help you get your affairs in order, such as home equity and bridge loans. And if you find yourself asking, “How do bridge loans compare to home equity loans?” reading through our quick overview can help you answer that question.
What Is a Bridge Loan?
Bridge loans are a form of short-term financial backing that is typically used to provide an extra cushion when a loanee is in the process of buying and selling homes simultaneously. This type of loan tends to have a smaller value, and because these loans can present more risk for lenders, they’ll typically come with slightly elevated interest rates.
And to offset any risk, bridge loan lenders will often include other fees and require that you put your property up as collateral to secure the loan. Lenders will assess your current mortgage responsibilities, other debts, and your daily finances to discern if you’ll be able to pay off the loan. Bridge loans have a short lifespan of six months to three years, and the deadline is usually set for when you sell your old home.
What Is a Home Equity Loan?
So, exactly how do bridge loans compare to home equity loans? To start, home equity loans also use your home as a form of collateral to secure financing. However, unlike bridge loans, you have to apply for home equity before your home is put on the market. So, it’s prudent to plan ahead if you’re interested in using home equity loans to finance your ventures. These kinds of loans have lower interest rates and don’t come with as many of the extra fees that are often seen in bridge loans.
That said, qualifying for home equity can be more difficult if you happen to have a poor credit history. And if you do have a spotty financial history, it’s wise to use your home as collateral. This helps offset risk for lenders, making them more likely to take you on. Additionally, home equity loans are long-term, as their lifespans can range anywhere from five to twenty years. This makes them an attractive option for borrowers who know they’ll need a bit of extra time to pay off what they owe.
How Do They Compare in Financial Situations?
Indeed, both options offer advantages and disadvantages. That said, bridge loans are best used when a borrower needs an additional cushion that they know they’ll be able to pay off quickly while waiting for more money to come in. Conversely, home equity loans are best utilized for loanees who need a bit of extra help in the long term.
Plus, they’re excellent for covering other types of expenses that might come with moving into a new home, such as hiring movers or purchasing furniture. In any case, both home equity and bridge loans help homeowners get the funding they need to sell their old properties and move into new ones. The one that will be most beneficial to you will largely depend on your current financial situation.