Bridge Loans vs HELOCs: Which Short-Term Financing Option Is Right For You?

Whether it’s a medical or family emergency, home improvements or a vacation, there are times when you need extra funds.

You can meet your immediate short-term financial requirements with the aid of short-term financing such as a bridge loan or a home equity line of credit.

Bridge loans and home equity lines of credit (HELOCs) are two short-term financing options. Read on to learn more about the similarities and differences between bridge loans and HELOCs and which of the two is better for you and your family’s needs.

If you’re looking to purchase a new home before selling your current one, you may need a short-term financing option to cover the down payment on the new place. Two popular choices for short-term financing are bridge loans and home equity lines of credit (HELOCs). But what’s the difference between these two options, and which one is right for your situation?

Overview of Bridge Loans and HELOCs

A bridge loan is a short-term loan used specifically to “bridge the gap” between the purchase of a new home and the sale of your current home It allows you to borrow against the equity in your current home to come up with the down payment on the new home,

A HELOC (home equity line of credit) also allows you to borrow against your home’s equity, but it is a revolving line of credit that can be used more flexibly for any purpose, not just buying a home

Here’s a quick overview of how bridge loans and HELOCs compare:

Use of funds: Bridge loans can only be used for a home purchase, while HELOCs can be used for any purpose.
Loan structure: Bridge loans provide a lump sum while HELOCs function as a revolving credit line.
Loan term: Bridge loans are short-term, usually 1 year or less. HELOCs have longer terms, typically 10 years.
Interest rates: Bridge loans tend to have higher interest rates than HELOCs.
Payments: Bridge loans require monthly payments on the full loan amount. With HELOCs, you only pay interest on the amount you draw.

When to Use a Bridge Loan

Bridge loans are tailored specifically for the purpose of buying a new home before selling the old one. Here are some key advantages of bridge loans:

Larger loan amount: You can borrow a lump sum up to 80% of your home’s value, allowing you to make a large down payment on the new home.
Competitive edge: A bridge loan allows you to make a compelling cash offer on the new home, giving you an edge over buyers needing financing.
Avoid interim financing: The bridge loan provides temporary financing so you don’t need a second interim loan before getting the new mortgage.
Shorter timeline: The short 1 year term motivates you to sell quickly and repay the bridge loan.

Bridge loans work best if you need a large loan amount for the down payment and are confident you can sell your current home quickly.

When to Use a HELOC

While a HELOC can also be used for buying a home, it offers greater flexibility:

Lower costs: HELOCs have lower interest rates and often no closing costs.
Tax deductible: If used for home improvement, HELOC interest may be tax deductible. Bridge loan interest is not deductible.
Flexible spending: You only pay interest on the amount used and can draw incrementally for renovations or other needs.
Longer repayment: The multi-year term offers more time to repay the loan.
Ongoing access: Even after buying the home, the credit line remains open for future needs.

HELOCs are a better option if you want to spread borrowing over time, need funds for other purposes, or want more time for repayment.

Key Factors to Consider

When deciding between a bridge loan and HELOC, here are some key factors to weigh:

Your credit score and debt-to-income ratio: Bridge loans often have stricter requirements.
Loan amount needed: HELOCs have lower limits, often around $200K.
Your home’s equity: Both loans require at least 15-20% equity.
Confidence in selling current home quickly: Bridge loans have a short 1 year term before repayment is due.
Other uses for funds: HELOCs allow you to access extra funds later for other needs.
Ongoing line of credit: HELOCs provide continued access to borrow against home equity.
Tax deductibility: Only HELOC interest is potentially tax deductible.

Pros and Cons of Each Option

Bridge Loan	HELOC
✅ Large lump sum	✅ Lower interest rates
✅ Competitive for offers	✅ Tax deductible interest
✅ Avoid interim financing	✅ Flexible spending
✅ Motivates quick sale	✅ Longer repayment term
❌ Strict qualification requirements	❌ Lower borrowing limits
❌ Higher interest rates	❌ Need ongoing discipline to avoid debt
❌ Must repay in 1 year	❌ Risk losing home if overborrowed

The Bottom Line

Bridge loans and HELOCs can both provide financing to purchase a new home before selling your current one. But they have important differences in loan amounts, flexibility, rates, terms, and ongoing access to credit.

Bridge loans are best if you need a large, short-term loan and know you can sell quickly. HELOCs offer lower rates and costs, tax advantages, flexible spending, and ongoing credit – but have lower limits.

Carefully assess your specific situation, financing needs and confidence in selling your home. That will help determine if a bridge loan or HELOC better fits your needs for short-term financing.

Can a bridge loan and HELOC be used in the same way?

Homeowners can borrow money using their homes as security through bridge loans and HELOCs, but they cannot be used in the same way

While both loans give the borrower money based on the amount of equity they have in their homes, they differ in how those funds are used, among other things.

Bridge loans are tailored for costs and expenses associated with buying a new property, like closing costs. HELOCs, on the other hand, can be used for a variety of things, such as paying for college, remodeling your house, starting a business and meeting other financial demands.

HELOCs also have the advantage of being less expensive and potentially tax deductible. On the other hand, a bridge loan is a high-risk, short-term financing option with a payment you make in addition to your monthly mortgage payment and typically features higher interest rates and additional costs.

The fact that a bridge loan is disbursed in one single payment is crucial if you require a lump sum, but you’ll need to start paying for it right away in contrast to a HELOC, which offers the borrower a fixed amount of credit with a payback period that may begin up to 10 years later.

How do I know which is best for my situation?

Your individual circumstances and capacity to repay the loan will determine whether you want to proceed with a bridge loan or a HELOC.

A bridge loan is typically a good option if you need money to spend on your new house.

A HELOC, on the other hand, offers longer terms for repayment if you don’t believe you’ll be able to pay back the loan in full immediately. Do your research before applying because different lenders will provide varying possibilities and conditions.

You’ll also want to estimate future costs that will be incurred. The bridge loan, for instance, can assist in providing the 20% down payment you need for your home.

Long-term mortgage payments are decreased by putting down this sum because private mortgage insurance (PMI) is no longer necessary.

However, if you have some money set up for your down payment but need to pool some extra funds, a HELOC would be a better option. Your savings and a smaller loan can help you come up with that 20% down payment.

HELOC Vs Home Equity Loan: Which is Better?

FAQ

Which is better, a home equity loan or bridge loan?

Bridge loans typically come with higher interest rates due to their short-term nature and the increased risk they pose to lenders. In contrast, HELOCs often feature lower, variable interest rates, with the added benefit that interest is only charged on the amount you actually draw.

What is better than a bridge loan?

And we suspect that most readers will find HELOCs more appealing. They tend, on average, to have lower interest rates and loan costs than bridge loans. And they’re more flexible over the repayment period, terms, and your use of the proceeds.

Is there a better option than a HELOC?

If you know exactly how much you need to borrow, a home equity loan can be a better option than a HELOC. Home equity loans tend to have lower interest rates than HELOCS, and the rates are usually fixed for the life of your loan.

Are home equity loans better than bridge loans?

Often, home equity loans have lower interest rates and fewer fees than bridge loans do. It is a challenge to qualify for a home equity loan if your credit history is poor, but when you use your home as collateral, lenders feel more comfortable issuing a loan as it is secured.

Can you get a home equity line of credit with a bridge?

Most lenders only offer bridge loans that are 80% of the value of the two loans together. You must have enough equity in your old home to be able to qualify. Lenders also look for low debt-to-income ratios when qualifying applicants for a bridge loan. What Is a Home Equity Line of Credit (HELOC)?

What is the difference between a bridge loan and a HELOC?

These loans are longer-term, usually allowing repayment of up to 20 years, and typically have more favorable interest rates compared to a bridge loan. HELOC: A home equity line of credit (HELOC) is similar to a home equity loan in that it draws against the equity of your current home, but it functions like a credit card.

What is a home equity line of credit (HELOC)?

HELOC: A home equity line of credit (HELOC) is similar to a home equity loan in that it draws against the equity of your current home, but it functions like a credit card. The interest rate is only charged if you access the money, and might be lower than that of a bridge loan.