We all need a little extra money at times. Sometimes all we need is a small loan to cover an expense until payday. Friends and family may be willing and able to help with that. On other occasions, we need much more than what our personal networks can provide. Things like purchasing a new home or windows come with high costs. In those cases, we turn to banks to get the money we need.
When the time comes that you need to access extra cash, you may consider a bridge loan vs HELOC. They have some real similarities between them, but each is its own entity. What's a HELOC or bridge loan used for? What sets them apart? Which is the best for my particular situation? Before taking out your loan, it’s important to know the difference.
Choosing a Bridge Loan vs HELOC
At their most basic, the two are fairly similar. Whether you’re looking at a bridge loan or HELOC, each will rely on your home equity as collateral. If you own a home, both can be great ways to get what you need at a decent interest rate.
Some of the biggest differences between the two have to do with the purpose of the loan and how long you might need the funds. Let’s look at a bridge loan vs HELOC comparison, as well as how to decide which one works for you.
What is a Bridge Loan?
In the bridge loan vs HELOC battle, the bridge loan stands particularly tall in one arena. A bridge loan is generally used to cover the price of buying a new home. It is distributed as a lump sum, and you pay it back when you sell your current home.
Often, the process of buying a new home doesn’t line up perfectly with the sale of our current home. If you find a new home you love but haven't sold your old home yet, you’ll need cash. Many people choose to take out a bridge loan to cover the down payment on their new home. It bridges the two events.
There are pros and cons of bridge loans, and weighing the balance will determine if it’s right for you.
Pros of a bridge loan vs HELOC
- It’s quick. The biggest pro may be the speed at which you can access funds. Many bridge loans are approved the same day, making it an ideal option when speed is key.
- A bridge loan allows you to put a down payment on your new property before selling the old one. This is a huge advantage for those relying on the sale of their current home to fund the down payment.
- It can also allow you to use the profits from your home sale to earn more in other investments. If the interest rate on another investment opportunity is higher than that of the loan, many people seize the opportunity.
- You may be able to defer any payments until you purchase your new home. If not, you can likely make payments only on interest during this time period, freeing up cash for the things you need in the interim.
Cons of a bridge loan vs HELOC
- Most bridge loans have very short durations. Most only last a year, so if you’ll need more time to pay off the loan, a HELOC may be a better option.
- Not all homes sell within a year. If the sale takes too long, you may find yourself looking for another way to pay off your bridge loan.
- Closing costs can make them more expensive. Home equity lines of credit typically don’t involve large closing costs, allowing you to save money with a HELOC.
- A bridge loan is considered a higher risk loan and usually carries a higher interest rate than a HELOC. If you don’t need cash quickly, this may not be your best option.
Alternatives to Bridge Loans
Sometimes we are looking for something similar to a bridge loan but want to use it for another purpose. Additionally, some seniors on fixed incomes need a slightly different option to help them move into assisted living facilities. Luckily, bridge loan vs HELOC isn’t the only loan discussion on the table. There are some alternatives that work in very similar ways, but are meant for other purposes.
- Fix and Flip Loans - These work very similarly to a bridge loan but are used for making improvements on a property. It’s basically a bridge loan for flipping houses.
- Government Down Payment Assistance Programs - If you are a senior who is making the transition from your home to an assisted living facility, this may be a good option. If you qualify, they can help with your down payment and closing costs, making it easier to secure the funding you need. It’s essentially a bridge loan for assisted living that may even be forgiven or lended interest free.
- Home Equity Loans - Not to be confused with a HELOC, home equity loans are another option when you need a lump sum all at once. The real bridge loan vs home equity loan difference is that a home equity loan can be used beyond the shorter periods associated with bridge loans. They also typically carry lower interest rates. To determine whether a bridge loan or home equity loan is right for you, talk to a professional.
What is a HELOC?
Now that we’ve covered bridge loans, let’s talk about HELOCs. A HELOC, or home equity line of credit, is another way to tap the equity you have in your home. Typically, though, you will use it for different purposes than you’d use a bridge loan for. Here are some differences when comparing a HELOC vs bridge loans.
First, a HELOC is a much longer term loan. It’s also a revolving line of credit, meaning you can take out what you need when you need it. Need a little now and a little later? A HELOC can be a great way to spread out the loan so you can minimize your interest.
A home equity line of credit typically has a draw period and a repayment period. The draw period may last up to ten years and is when you will use the funds. You can take out as much or as little as you want throughout. (Some loans have a minimum amount, so you should check with your lender.) Once the draw period ends, you enter the repayment period. Here are some pros and cons of going with a HELOC.
Pros of a HELOC vs bridge loan
- You don’t have to pay HELOCs off right away. In fact, you often don’t have to pay anything for the first ten years. Stretching out those payments can take some pressure off.
- You don’t need to use the whole amount. If you utilize less than the whole amount, you only have to pay interest on the funds you actually use.
- Lower interest rates. The rate you actually receive will vary based on your creditworthiness, but they are comparatively low. They are a variable rate product, but the rate will almost certainly be cheaper than credit cards and personal loans.
Cons of a HELOC vs bridge loan
- Longer processing time means it takes longer to get your funds. While you can often close on a bridge loan in a day, it may take weeks to months to secure a HELOC. It’s best to begin the application process before putting your home on the market.
- Depending on your credit score, it may be difficult or impossible to secure a HELOC. The better your score, the better you can expect your interest rates to be.
- Most lenders require borrowers to have 15-20% equity to be considered. If you haven’t reached that threshold, it may be hard to close on a HELOC.
With lower interest rates, many people wonder, can I use a HELOC as a bridge loan? While it is possible in many instances, it won’t always make sense. If you have too little equity or a credit score on the lower end, you may not qualify at all. Also, paying off the loan more quickly allows you to invest in other opportunities.
Bridge Loan vs HELOC: Making Your Decision
When you’re ready to request your much-needed cash, reach out for help. Working with a financial advisor is the best way to weigh the benefits of a bridge loan vs HELOC. They know the ins and outs of each. You don’t have to spend days digging through articles and interest rates to find out which one will work best.
If you can’t choose between a bridge loan vs HELOC, make sure you go with a reputable lender. They’ll make sure your options are well understood and that you’re well taken care of. You’ll also pay fewer fees and get better interest rates. If you’re ready to access some funds, we’re ready to hear from you.