Buying a new home before selling your current one can be overwhelming, and bridge loans have been the go-to solution – until now. Among the various financing options available, bridge loans have traditionally been a popular choice. But is it the best one? In this post, we will explore the pros and cons of bridge loans, how they work, and why our partnership with Catapult might be the game-changing solution you need.
Bridge loans allow homebuyers to take out a short-term loan against their current home to cover the down payment on a new property before their first home sells While bridge loans provide quick access to funds, they come with high interest rates and the risk of foreclosure That’s why it’s important to look at alternatives that provide more affordable, longer-term financing. This article will explore options like home equity loans, HELOCs, cash-out refinances, seller financing, rent-back agreements and home equity investments.
Home Equity Loan
A home equity loan lets you borrow against the existing equity in your home. These loans provide a lump sum of cash upfront, which you can use for any purpose including a down payment on a new house.
Home equity loans have fixed interest rates and set repayment terms of up to 20 years. This gives borrowers much more time to repay the debt than the 1 year maximum term on bridge loans. Interest rates on home equity loans also tend to be lower, with starting rates around 5% compared to 8% or more for bridge loans.
If you need a set amount to cover a new down payment, a home equity loan provides affordable, long-term financing without the risks of a bridge loan. Just keep in mind home equity lending limits – you can usually only borrow up to 85% of your home’s value minus what you owe on your mortgage.
Home Equity Line of Credit (HELOC)
Similar to a home equity loan, a HELOC allows you to borrow against your home’s equity. However, with a HELOC you have a revolving line of credit you can draw on as needed, rather than one lump sum.
HELOC interest rates are also lower than bridge loans, with starting rates around 5% compared to 8% or higher. Terms can extend up to 20 years, giving you ample time to repay the debt gradually.
If you want more flexibility than a lump sum home equity loan, a HELOC lets you access funds as you need them to cover down payments, deposits, moving and other costs. Just be aware of draw periods and repayment terms to avoid higher interest rates.
Cash-Out Refinance
With a cash-out refinance, you take out a new mortgage that’s larger than your current balance. The extra funds above your old mortgage principal are paid to you as cash. This lets you tap your home equity while consolidating it back into your mortgage.
Cash-out refinance rates are very low right now, starting around 5% for well-qualified borrowers. You also get to keep the sale proceeds from your old home to pay off the refinance.
If you don’t necessarily need funds right away, a cash-out refinance lets you access equity at today’s rates and gives you 15 to 30 years to repay it. Just be sure to shop around for the best lender fees and closing costs.
Seller Financing
Seller financing means the home seller funds all or part of the buyer’s purchase in lieu of a traditional mortgage. This can help buyers who can’t get approved for a regular home loan.
For example, the seller might carry a second mortgage you pay off when your old home sells. Or they may let you make a smaller down payment and carry the rest of the price at an agreed interest rate.
Seller financing requires finding a willing seller. But it avoids bridge loan rates and gives you time to sell your old house before repaying the seller’s mortgage. Make sure to get agreements in writing.
Rent-Back Agreement
In a rent-back agreement, you sell your home to the buyers but continue living there as a tenant for a fixed period – usually 1 to 2 months. This gives you time to close on your new home while the buyers move into their newly purchased property.
You’ll pay rent to the buyers during your tenancy. But you avoid overlapping mortgages and high bridge loan costs. Just make sure to consult an attorney to put rent-back terms in writing.
Home Equity Investment
With a home equity investment, you sell a percentage stake in your home to an investor rather than taking out a loan. The investor then receives their share of proceeds when you eventually sell the home.
For example, you might sell a 20% share to cover a new home’s down payment. When you sell, the investor gets 20% of the sale price. But you avoid monthly mortgage payments and can split sale proceeds.
Home equity investing simplifies tapping equity with no loans or interest. But make sure contracts are reviewed by a real estate attorney first.
Key Takeaways
While bridge loans allow quick access to cash, alternatives like home equity loans, HELOCs and cash-out refinances provide lower rates and longer repayment terms. Seller financing, rent-back agreements and home equity investments also let you leverage home equity without taking on expensive bridge loan debt.
Each alternative has pros and cons based on your specific situation. But exploring multiple options is important before committing to a bridge loan with its high costs and risks. With the right alternative financing, you can tap the equity in your current home in a more affordable, sustainable way as you transition to your new property.
Bridge Loan Vs. HELOC
An alternative to this short-term solution is a Home Equity Line of Credit (HELOC). This option allows homeowners to borrow against the equity of their current property. But, similar to short-term loans, a HELOC comes with its own set of risks. If the housing market slows and your property takes longer than expected to sell, you could find yourself grappling with multiple loan repayments.
Enter Catapult: A Game-Changing Solution
Here’s where Catapult, a revolutionary alternative to bridge financing, comes into play. Catapult provides a straightforward and cost-effective process that eliminates the need for managing double mortgages or moving multiple times.
3 Alternatives to Bridging Loans
FAQ
What is better than a bridge loan?
Is there a cheaper alternative to a bridging loan?
How to avoid a bridge loan?
What is the difference between a swing loan and a bridge loan?
What are the different types of bridge loans?
Variations in bridge loans are typically related to the wide range of terms that lenders extend based on factors like borrower creditworthiness and financing needs. Therefore, while bridge loans aren’t necessarily classified into certain types, they often vary by interest rate, repayment method and loan term.
Can a bridge loan be used for real estate?
Yes, a bridge loan can be used for real estate.A bridge loan is a short-term loan that allows borrowers to purchase new real estate property by using the home they currently own as collateral .It is also
Are there alternatives to bridge financing?
To help you afford the house of your dreams and save on costs at the same time, we’ll explore six options for alternatives to bridge financing. Home equity loans are one of the most popular alternatives to bridge loans.
Are home equity loans a good alternative to bridge loans?
Home equity loans are one of the most popular alternatives to bridge loans. With this type of loan, you borrow against the equity in the existing home you’re selling to fund your new home’s down payment and closing costs. 2 Home equity loans come with a fixed interest rate that’s usually slightly higher than the current mortgage interest rates.