There’s hardly a worse feeling for a homeowner than when they struggle financially and aren’t sure how they can keep a roof over their family’s heads. Oftentimes, they turn to traditional lending institutions to acquire various types of loans, including home loans, bridge loans (if it’s a transitionary period), or home equity lines of credit (HELOC). Here we’ll go over what bridge loans and HELOCs are, their differences, and whether you should consider them or an alternative.
What is a Bridge Loan?
Bridge loans are short-term loans, secured by your current home, that are taken out when a homebuyer wants to buy a new home before their current one sells. Bridge loans may not exceed 80% of the home’s value. Essentially, the loan “bridges” the gap between the selling price of the new home and the buyer’s new mortgage if the current home has not yet been sold. Bridge loans are a short-term influx of cash during a transitionary period in real estate and are not used outside of this purpose.
How Bridge Loans Work
First off, in order to acquire a bridge loan, you need to have at least 20% equity in your home. Any less, and you will not be eligible.
Bridge loans are mainly used for two reasons: the first being a means of paying off your existing mortgage and putting money toward your new downpayment. The second, but seldom used, reason is that a bridge loan can act as a mortgage for your new house.
So, hypothetically, if your home is worth $250,000 with $150,000 left owed on the mortgage, a bridge loan worth 80% of your home value would put $200,000 in your pocket. This money would then be used to pay off your existing mortgage, leaving you with an extra $50,000 with which you may use on the new home’s down payment.
In this way, the loan “bridges” the transition between old home and new home. The downside to bridge loans is that they:
- require 20% equity in the home
- it’s very possible you will run into a situation where you pay off 2 mortgages at the same time
- like most short-term loans, interest rates are very high
What is a HELOC?
A home equity line of credit, or HELOC for short, is a loan that lets you borrow against the equity you’ve built in your home; it is somewhat akin to a 2nd mortgage. HELOCs are generally taken out whenever a large expense needs to be paid off (eg. education, renovations, medical bills, etc.) because home equity is generally the most valuable asset someone can have. They are NOT used to pay for day-to-day life expenses.
How does a HELOC work?
Because a HELOC is essentially a line of credit, albeit with tighter restrictions, it works the same way a credit card does — you agree to term limits, borrow money to pay for expenses, and then repay that money plus interest. The difference is that if you are unable to repay a HELOC, your home can be taken from you since it is the main collateral.
HELOCs are different from home loans by the fact that you do not receive money in a large lump sum, but rather are able to “draw” money out of it whenever necessary, like a credit card. Additionally, HELOCs carry variable rates instead of fixed ones, which are subject to unforeseen real estate market forces. If you miss payments on a HELOC, your lender also reserves the right to freeze or reduce the credit line you have access to.
What if Neither Bridge Loans or HELOCs are Right For Me?
SKYDAN Equity Partners offers a home sale/leaseback program that allows homeowners to access their home equity to pay for life’s expenses. There are no stringent term limits that come with HELOCs, and there are no predatory motives, such as the ones that come with many short-term loans (eg. sky-high APR).
Here’s how it works:
We buy your home and in return give you a large sum of cash, with which you pay off existing debts (property taxes, credit card debt, medical bills, etc.). You then lease the home back from us for up to 24 months with deferred rent payments. This means that while you’re leasing your home back from us, there are no monthly payments, no interest paid, and no added debt.
At the end of the 24-month period, you have two options:
Purchase the home back (original price + deferred rent)
OR
Sell the property, keeping all additional equity
We don’t care about your credit score, employment history or debt-to-income ratio. We are here to help you break the cycle of debt, not add to it as traditional home loans do. The only thing you need in order to qualify for our program is to have enough equity in your home. If you need to tap into your home’s equity to help pay for life expenses and are wary about reverse mortgages, give us a call today for a consultation.