Home equity loans are typically junior loans and should not be confused with a basic refinance, which means paying off an existing mortgage and replacing it with another loan. Refinances can take 30 days or more to process. Home equity loans fund fairly quickly and are subordinate to an existing first mortgage. In other words, an equity loan falls into second position.
The lender's security for the loan is your home, meaning if you go into default and do not make your mortgage payments or otherwise abide by the terms of the loan, the lender has the right to foreclose. In many states, like California, if a homeowner stops paying the first lender, to protect its security, the second-position lender can step in, make up the payments to the first lender and begin its own foreclosure proceedings. All of which means your home is at risk when you take out a home equity loan.
Bridge loans are used by sellers who want to buy a new home before selling an existing home but need the cash from the existing home. You will see bridge loans used more often in seller's markets than in buyer's markets. Common terms for a bridge loan are:
- Loan amounts up to 80% of market value
- Higher loan costs such as points or admin fees
- No payments for 3 to 4 months
- Right to renegotiate loan terms if home does not sell within loan term
- Some lenders demand the borrower obtain the financing for their new home from the lender making the bridge loan