Planning to do some renovations? Or perhaps you’re looking to buy a new home?
Whatever your plans are, they usually involve a lot of spending. Bridge loan vs home equity loan, which option is better for your plans?
Borrowing money for this project is not bad. But you have to know the difference between a bridge loan and a home equity loan. That way, you’ll be able to make a sound financial decision on your next loan.
Keep reading to learn more about the differences between them.
Bridge Loan vs Home Equity Loan: The Differences
When securing financing for a real estate purchase, borrowers have a few different options available to them. The two options are bridge loans and home equity loans.
Your home is used as collateral in both of these loans. The primary distinctions between a bridge loan and a home equity loan are their intended uses, interest rates, periods, repayment schedules, and equity requirements.
What Is a Bridge Loan?
Bridge loans are typically used in connection with equity bridge financing, a type of short-term loan with high-interest rates than conventional loans. It’s typically ranging from six months to three years.
It is usually called a bridging loan in the United Kingdom and is also known as a swing loan in the United States. Bridge loans are often used to finance the purchase and/or refurbishment of a property.
The use of a bridge loan is to purchase a new home before selling an existing home. The loan is typically secured by the old property and the funds are used to purchase the new property. The loan will be repaid once the old property is sold.
What Is a Home Equity Loan?
Home equity loans are long-term loans used to finance the purchase of a new home and are usually paid off over 15-30 years. Home equity loans are typically used for home improvements, debt consolidation, medical bills, college education, or other major expenses.
The loan amount is determined by the value of the property, and the value of the property is determined by an appraiser from the lending institution. Home equity loans often have lower interest rates.
A home equity loan is usually for a lump sum of money that you pay back with fixed monthly payments over a certain period of time.
So, which is right for you? It depends on your individual situation. If you need a quick loan for a short-term project, a bridge loan might be the way to go. If you have a long-term project in mind and can qualify for a lower interest rate, a home equity loan might be the better option.
A Loan for Your Dream House
Now that you are aware of the distinctions between a bridge loan vs home equity loan, make sure to take your financial objectives into account, as well as the variations in the loans’ structures.
A bridge loan is often more expensive in the short term because of its shorter term and higher interest rate. You may need to have equity built up in your house to qualify for home equity loans, which feature longer repayment terms and lower interest rates.
Both loans have advantages and disadvantages, so talk to a financial expert to determine which is best for you.
For more information on borrowing money and managing debt, visit our blog for more great articles.