Bridge loans vs bank loans: The key differences
If you’re hoping to buy a new home, but you still own an existing home, you know the financial stress of potentially owing on two mortgages at the same time.
That’s why some homeowners seek out a bridge loan.
A bridge loan helps you buy some time to sell your existing home, without potentially losing out on the purchase of a new home.
What is a bridge loan?
A bridge loan is
- Short-term
- Immediate cash flow
With a bridge loan you’re typically looking at a loan of up to 12 months. It’s assumed most homeowners are able to sell their existing home during this time period, then use the proceeds to pay off the bridge loan.
In the meantime, though, the cash is there to go ahead and purchase a new home. You now have money available to proceed with a down payment.
Considerations of a bridge loan
There are some considerations.
A bridge loan usually has
- High interest rate
- High origination fees
Some homeowners are more than willing to put up with the high rates, though, because they know it is short-term.
In order to get a bridge loan, you need to have
- An excellent credit rating
- A low debt-to-income ratio
Benefits of a bridge loan
Of course, there are plenty of benefits.
A bridge loan is
- Faster
The entire application, approval and funding process is usually much faster with a bridge loan than it is with a traditional loan.
While not all lenders offer bridge loans, there are lots of options out there for acquiring a bridge loan.
While loans such as these can certainly be appealing, they’re not the only option for cash-strapped homebuyers.
What is a bank loan?
Another option is to stick with a traditional bank loan.
This type of loan works generally the same as a personal loan.
You
- Apply
Then, the bank reviews things like your
- Credit score
- Income
- History
It’s up to the bank to decide how much money they’re willing to lend you, and at what percentage rate.
Once you’ve secured the loan, you’re then responsible for paying it off in monthly installments.
Considerations of a bank loan
Like a bridge loan, there are some considerations with a bank loan.
Some banks will only offer a bank loan to an
- Existing customer
It’s helpful if you have an account in good standing. You also generally need
- Good or excellent credit
- Strong credit history
- Low debt-to-income ratio
Benefits of a bank loan
Assuming you make all the payments on-time, every time, a bank loan can help you build your credit history.
If you’re looking for an alternative to a bridge loan, therefore, you can always consider the many other options out there.
