Bridge Loan vs. Home Equity Loan Which Is Right for You

There are many reasons you may want to apply for a second mortgage, whether it’s a home loan, home equity line of credit, or bridge loan. For instance, you may want to do some renovations, start a new business, or purchase a new home.

If you are in the market to buy a new home and uncertain how to go about funding the down payment, a bridge loan or home equity loan may be the solution you seek. The question then is: how do you decide which is right for you when it comes to a bridge loan vs. a home equity loan, and is one preferable to the other?

Let’s break down the differences so you can decide which one might work better for your situation.

Bridge Loans Explained

You’ve found a home you want to buy but you’ve encountered a slight problem: you were planning to put the proceeds from the sale of your current home toward the down payment of your new home. You’re unable to fund the down payment without those sale proceeds, but you don’t want the home you have your eye on to slip through your fingers while you’re waiting to find the right buyer for your home. So what do you do?

A bridge loan may be just the solution you need. When you take out a bridge loan, you use the equity from your existing home as collateral to borrow new funds from the bank. You can then use those funds as a down payment toward your new home loan purchase so you’re not in a rush to sell. Instead, you can hold out for the right offer from the right buyer. A bridge loan can buy you the time you need in the interim, providing you with the opportunity to make a down payment even while your current home is still on the market.

There are other advantages to bridge loans as well. For example, you don’t have to find a temporary residence or put your belongings in storage since a bridge loan allows you to close on a new home while also holding on to your former residence in the short term. You could transition straight from your old home into your new one.

Some bridge loans also allow you to finance up to 90 percent of your existing home’s appraised value. Plus, when you close on a bridge loan with Solarity Credit Union, you are able to make interest-only payments for the first 12 months so that you can avoid making 2 mortgage payments at once. Instead, you can focus on settling into your new home and becoming better acquainted with your new neighborhood.

Home Equity Loans Explained

The thing to know about home equity loans is that there are two main types: a home equity loan and a home equity line of credit. With both types of equity loans, you borrow against the equity you’ve built up in your home, using your home as collateral. Home equity loans are independent of your existing mortgage. They compound interest and must be repaid separately.

With a regular home equity loan, you borrow the equity as a lump sum and then make monthly payments toward the principal and interest until the loan is paid in full or until you sell the collateral. This is why it’s often referred to as a second mortgage. If you sell your home, the proceeds from that sale will be used to pay off the outstanding loan balance.

A home equity line of credit (HELOC), on the other hand, functions more like a cross between a bridge loan and a credit card. It’s similar to a bridge loan in that you make interest-only payments for a set period of time, known as the draw period. Unlike a bridge loan, however, the draw period for a HELOC usually spans several years or more. During the draw period, you can borrow the full amount of the line, pay it down, and then continue borrowing against the line as many times as you’d like.

Think of it as similar to the way you can charge a balance to a credit card, pay it off, and then charge the full credit limit to the card again. Unlike a credit card though, HELOCs have a set loan term. So once the draw period ends, you start paying back the outstanding principal plus interest just as you would on a conventional home loan.

Bridge Loan vs. Home Equity Loan

So, which is better for you when it comes to a bridge loan vs. a home equity loan? Well, that all depends on you.

For instance, how quickly do you need to access the extra cash? If you’re in a rush to buy, a bridge loan may work best. As Forbes explains, the application and underwriting process is typically faster for bridge loans. However, keep in mind that you’ll likely pay higher interest rates because bridge loans are intended to be used as short-term financing only.

On the other hand, you may be looking to secure a loan with a longer term so you’re not in such a rush to pay it back. Or maybe you simply want to save some money by securing the most competitive interest rate. If that’s the case, a more conventional home equity loan or home equity line of credit may be the better option.

There are pros and cons to each option. If you have more questions about a bridge loan vs. a home equity loan, reach out to one of Solarity’s Home Loan Guides to assist you further. If you decide to proceed with a bridge loan, Solarity can do a convenient one-time closing on both your bridge loan and new home loan purchase. If you prefer to close on a home equity loan instead, a Home Loan Guide will walk you through the HELOC process.

Don’t let your dream of a new home slip away. By partnering with the team at Solarity Credit Union, you can find the right home loan solution for you.