Buying your next home before your current one sells puts you in an awkward spot. The down payment is due on the new place, and the money to cover it is sitting in the house you have not sold yet.
Two loans solve that problem in different ways. Both use the equity in your home. The difference is how you draw the money and when you pay it back, and that difference is what should decide which one you use.
What is a bridge loan?
A bridge loan is short term financing that carries you from one home to the next. It is secured by property you already own, and it exists to close the gap between the purchase of the new home and the sale of the old one.
Ours are structured as short term, interest only financing, with funds disbursed as you need them. Because the loan is designed to be repaid when your current home sells, we prefer that your permanent financing is already secured before you take one.
The appeal is simple. You can make a down payment on the new home without waiting for the proceeds from the old one.
What is a home equity loan?
A home equity loan is generally a second mortgage on the home you already own. You borrow a fixed amount one time, and you repay it with fixed monthly principal and interest payments.
A home equity loan and a line of credit do the same underlying thing, which is put your equity to work. The loan hands you the full amount at once. The line lets you draw and repay as you go, with interest only payments monthly. If you have one expense with a known number, the loan usually fits. If you expect to draw more than once, the line usually fits.
Unlike a bridge loan, a home equity loan is not tied to the sale of your house. That makes it useful well beyond a move.
How do bridge loans and home equity loans differ?
| Bridge loan | Home equity loan | |
|---|---|---|
| Purpose | Carries you from one home to the next | Puts existing equity to work for any purpose |
| Term | Short term, sized to the transition | Longer, repaid on a set schedule |
| Payments | Interest only | Fixed principal and interest |
| Repaid by | The sale of your current home | Scheduled monthly payments |
| Best when | You have found the next home and have not sold this one | You know the amount you need and want a predictable payment |
The table is the short answer. The longer answer is that a bridge loan assumes a sale is coming, and a home equity loan does not. That single assumption drives most of the decision.
How much equity do you actually have?
Most people planning a move look at their checking balance first. It is worth looking at what you already own instead.
Equity is the current market value of your home less any loans against it. Say you bought ten years ago for $250,000 and put $50,000 down. You have paid the balance from $200,000 down to $160,000, and values in your area have held steady.
- Current value: $250,000
- Mortgage balance: $160,000
- Equity available: $90,000
If values in your area have risen, your equity has risen with them. In an actual loan, an appraiser sets that value. The appraiser is a disinterested third party, is engaged by the bank, and generally works from recent sales of similar nearby properties. It is also worth understanding what actually moves your home's value before you count on a number.
That $90,000 is the pool both of these loans draw from. How much of it is available to you depends on the property, your financial picture, and the purpose of the loan.
Not sure which one fits your situation? Talk with a local lender who knows your market.
Which one fits your situation?
A few situations sort quickly.
You found the next house and yours is not sold
This is the bridge loan case. You need money for a defined window, and a sale is going to close it.
You are staying put and funding a project
This is the home equity case. A remodel with a set budget, a consolidation, a down payment on something else. No sale is coming to repay it, so the fixed schedule matters. Our home improvement projects piece covers what tends to be worth doing in Minnesota.
You are building rather than buying
That is its own conversation. Start with construction loan financing.
You are trying to time a sale and a purchase together
Read buying and selling a house at the same time. The sequencing matters more than the financing.
You are early in the process
Start with how to buy a house and come back to this decision once you have a target.
What should you think about before either one?
Both loans are secured by your home. That is what makes the rates work, and it is also the risk. If you cannot repay, the lender can foreclose.
For a bridge loan, the risk concentrates in the sale. If your current home takes longer to sell than you planned, you are carrying two obligations longer than you planned. Be honest about what your house will do in your market, not what you hope it will do.
For a home equity loan, the risk is slower and easier to miss. You are converting equity you built into a payment you have to make. That is a good trade for a project that adds value. It is a worse trade for an expense that does not.
Your debt-to-income ratio is where the two meet. Target a ratio under 35%, and keep your total obligations at no more than 43% of your gross monthly pretax income. The lower the ratio, the more room you have.
Common questions about bridge loans and home equity loans
Can I use a home equity loan for a down payment on my next house?
Yes. A home equity loan is disbursed as a lump sum you can use for a down payment, and it is not tied to the sale of your current home. Whether it or a bridge loan fits better depends on how soon you expect that sale to close.
How long does a bridge loan last?
It is short term by design, sized to the transition between homes. Because repayment depends on your current home selling, the term is set against a realistic sale timeline rather than a standard number.
Is the interest on a home equity loan tax deductible?
It can be. Interest may be deductible when the funds are used to buy, build, or substantially improve the home that secures the loan. The rules changed in 2018 and limits apply, so talk with your tax advisor about your circumstances before you count on it.
How much equity do I need?
There is no single number. What is available depends on your home's appraised value, what you still owe, your financial picture, and what the money is for. Your lender will walk through it with you.
What happens if my house does not sell in time?
Talk to your lender early rather than late. A bridge loan is built around an expected sale, so when that timeline moves, the sooner we know, the more options are on the table.
Do I have to choose between the two?
Not necessarily. The right structure depends on your timeline, your equity, and what happens after the move. That is the conversation to have before you commit to either.
Let's talk it through
Bridge loan or home equity loan is not a question you should have to settle from a web page. The answer depends on your timeline, your equity, and what your local market is actually doing.
We have been lending to Minnesota homeowners since 1935, and your loan is decided by a lender who works in the market you live in. Explore personal loans and mortgages, or find your nearest branch and start the conversation.
