You’ve decided to move to a new home and you are ready to make an offer. Unfortunately, you need to sell your old home in order to be able to buy the new one. You won’t be able to pay for a new mortgage loan before selling your current home, so you basically have only two options: a bridge loan or a home equity line of credit (HELOC).
Both the bridge loan and the home equity line of credit have advantages and disadvantages. It depends on your individual financial standing if one or the other is right for you. Before deciding on which one to choose, let’s go through a few of their advantages.
Advantages of a Bridge Loan
Bridge loans are short-term loans that you can get in order to pay the down payment on your new home. Lenders are always happy to help you with a bridge loan, if you qualify. The amount of the loan is usually small, around 3 percent of the purchase price. Here are the advantages that you will have if you choose to take out a bridge loan:
- The bridge loan can be borrowed against the equity in your old home. This is possible while the house is listed, unlike with the home equity line of credit, where the financing must be set up before listing your current home.
- Not required to make any monthly payments until your current home is sold. This is unlike you would on a home equity line of credit. The balance on the bridge loan, as well as the interest, is paid at the time the old house is sold.
Advantages of a Home Equity Line of Credit (HELOC)
The home equity line of credit is a type of loan where the collateral is the equity in your home. What makes the HELOC different from a conventional mortgage loan is the fact that you are not given the entire borrowed amount up front. After a maximum balance is established, you may borrow amounts up to the maximum, like you would with a credit card. Here are the advantages that the home equity line of credit has:
- The interest rate and fees are lower than on a bridge loan. The downside, as we mentioned earlier, is that you must take out a home equity line of credit before listing your current home for sale. This means that you should plan ahead if you want to use this type of financing.
- With this type of loan you also have access to funds in the future, without reapplying. These funds can be used for home improvements or repairs, and other recurring expenses.
At first glance, it seems that the home equity line of credit is the cheapest option when it comes to short-term financing. In the end, your personal finances are the most important factor in determining if a bridge loan or a home equity line of credit is the right choice for you.