For those of you who don’t know, a bridge loan is a financing option that is offered by private lenders and a few companies and banks. You will usually find bridge loans being used in the financing of the purchase of a new home. The reasons it is called a bridge loan because it acts as the bridge during the time period in between the time purchase of the new home is made and the time when the homeowner is able to find another, more reliable form of finance which in turn is used to pay off the bridge loan and the remaining cost of the home purchase. I have also seen borrowers make use of bridge loans to prevent a certain project from being closed.
Now just like bridge loans, a home equity loan is also used to pay off a new home purchase, but really is the difference between these two? Let us try to find out and compare and try to determine which of the two is preferable.
When you apply and able to get a home equity loan, the interest rates are lower compared to that of a bridge loan. However, with a home equity loan, should you go into a default, you will run the risk of losing your newly purchase home and you do not want that to happen. What are you going to do if you lose your home and have nowhere to go?
It is a different story when we talk about bridge loans. When you apply for a bridge loan, the home will become the collateral. When you use bridge loans to finance a home purchase, you will also be able to enjoy some benefits. One of those advantages is that since the bridge loan does not go for a long term, you can pay it off within a span of two months to three years. Because of this, you will not have to worry about any more payments in the future as with home equity loans which are long term loans.
So it would be understandable why bridge loans have higher interest rates because have around twenty years compressed into three. In addition to that, there are no penalties you would have to worry about with bridge loans because it is lent by a private person.
But it is important to take note; there are downsides to using a bridge loan as a mode of finance. As we have mentioned, bridge loans have a higher interest rate but this is only because the payment is made in a shorter period of time. You should expect to pay interest rates around ten percent or higher, but this will also depend on the lender.
In my opinion, bridge loans are the option to go if: You need the money quickly and don’t want to go through a lot of paper work and you are capable of paying of the amount with the interest when the time comes. So before you apply for a bridge loan, make sure you properly asses yourself and the situation.