Bridge loan vs. HELOC: How to decide

When you're in the midst of buying a new home, you might find yourself needing extra funds to cover costs before selling your current property. Two popular options to bridge this financial gap are home equity lines of credit (HELOCs) and bridge loans. Both can provide the necessary liquidity but differ significantly in structure, cost, and flexibility.

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In this article, we’ll discuss how HELOCs and bridge loans work, when they may be a good solution for your needs, and financing alternatives if neither option works for you.

How a HELOC works

A home equity line of credit (HELOC) works similarly to a credit card. During the five to 10-year draw period, borrowers can withdraw funds up to their approved credit limit and are only responsible for interest payments. 

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After the draw period ends, the repayment period begins and lasts 10-20 years. Borrowers are responsible for monthly payments over the term. HELOC interest rates are usually variable; however, some lenders offer fixed-rate options.  

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HELOCs are ideal for homeowners who need a flexible financing tool over an extended period of time. 

How a bridge loan works

A bridge loan is designed for mortgage holders in between properties. Borrowers often use a bridge loan as a down payment on their new property while they find a buyer for their existing property. 

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These loans typically last 6-12 months and are secured by the borrower’s first property. However, some lenders provide bridge loans that last up to three years. 

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Depending on the lender, you can repay your bridge loan through a series of installments throughout the life of the loan or with a single balloon payment at the end of its term.

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Bridge loans are great for homeowners who need to make a payment on a new home (usually a down payment) without having to rush or lower the sales price of their current home.  

HELOC vs. Bridge loan: Key similarities

Financing for a new property 

Both a HELOC and bridge loan will help you access the funds you need to finance a new property. Using either product, you can generally leverage 80%-85% of your current home’s worth.

Eligibility criteria

Qualifications are similar for HELOCs and bridge loans. Both require sufficient equity and income, good credit, and a decent debt-to-income (DTI) ratio. 

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HELOC lenders usually require borrowers to have 15%-20% home equity, a credit score of 620 or higher, a DTI of 45% or less, and decent income. 

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Bridge loan lenders can have slightly stricter criteria, requiring borrowers to have a minimum of 20% home equity, a credit score above 680, a DTI of 50% or lower, and good income. 

Collateral

Both HELOCs and bridge loans are secured by your property, which means that defaulting on either puts your home at risk. However, since loan terms for a bridge loan can be a lot shorter than a HELOC, borrowers should carefully consider the risk of defaulting.

Bridge loan vs. HELOC: Key differences

Funding timeline

With a bridge loan, you can get the cash you need in as little as a few days. On the other hand, HELOC funding can take 2 to 6 weeks. 

Funds disbursement

Both bridge loans and HELOCs provide cash to borrowers. However, bridge loans provide money a single lump sum payout, while HELOCs offer a revolving line of credit. 

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Because of this, you’ll owe interest on the total bridge loan amount—regardless of how much you use. Meanwhile, with a HELOC, if your down payment changes, you can draw more or less, and you will only pay interest on what you borrow.

Repayment terms

Bridge loans have much shorter term lengths, 6 months to 3 years. Most lenders require a single balloon payment settled at the end of the loan term. However, borrowers can shop around to find a lender willing to offer monthly payments spread out over the life of the loan. Additionally, the interest rates on bridge loans are usually several points higher than HELOCs and traditional mortgages. 

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While the principal on a HELOC doesn’t need to be repaid until the repayment period starts, borrowers need to make interest payments on the amount they’ve borrowed throughout the withdrawal period. The HELOC repayment period, where you can expect to pay the principal and interest, lasts anywhere from 10-20 years. 

How to choose between a bridge loan vs. HELOC

When choosing between a bridge loan and a HELOC, it’s best to weigh your short and long-term needs. 

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A HELOC may be a better fit if you qualify for a lower interest rate, need access to funds periodically, or want to buy a new property without selling your current home. HELOCs are also good options for homeowners who need more time to make payments or are unsure how much money they’ll need. 

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Bridge loans are a great solution for borrowers who are looking to get into their next property quickly—like a real estate investor who doesn’t want to miss a good investment opportunity or someone needing to relocate for work. If you’ve found a place you don’t want to wait on, you may need quick access to a lump sum of cash to cover a down payment, closing costs, and other fees related to your home purchase. 

Alternatives to HELOCs and bridge loans

In some cases, neither a HELOC nor a bridge loan will be the right fit. Luckily, there are several financing alternatives for homeowners to explore. 

Home equity loan

A home equity loan allows you to borrow a lump sum of cash against the equity in your home. Borrowers repay the loan at a fixed interest rate over a 5-30 year repayment term. Requirements are similar to those off HELOCs. 

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Homeowners can use the funds from a home equity loan to cover a large down payment on their second home. This can also help reduce monthly payments on your new mortgage.

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Pros:

• Lower and fixed interest rates: Loans secured by a property usually have lower rates than unsecured loans. Interest rates on home equity loans are also fixed, which means monthly payments are predictable. 
• Access to a large lump sum: A home equity loan allows homeowners to borrow up to 85% of their home value, minus what they owe on their mortgage. This often provides borrowers with a larger lump sum than other loans.

Cons: 

• Closing costs and fees: As with any loan, home equity loans have closing costs and fees related to loan origination and appraisals, which can often add to the total cost of borrowing.  
• Risk of foreclosure: Like any equity financing product, you risk losing your home should you default on the loan. 

Home equity investment

A home equity investment (HEI) provides homeowners with a lump sum of cash in exchange for a portion of their home’s future appreciation. Homeowners can repay their HEI within 30 years, or whenever they sell or refinance their home. There are no restrictions regarding how the funds can be spent—including buying another property. 

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Pros:

• No monthly payments: There are no monthly payments over a flexible 30-year term. 
• Flexible credit evaluations: HEIs are available to homeowners with a credit score above 500 and who own at least 15% equity in their home. There are no income or DTI requirements. 

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Cons:

• Uncertain buyback costs: Since HEIs are based on the future value of a home, borrowers won’t know exactly how much they’ll pay back until the end of their agreement.
• Associated fees: Home equity investments, like other home equity products, have origination fees, appraisal fees, and closing costs. 

Cash-out refinance 

A cash-out refinance allows homeowners to replace their existing mortgage with a new one that is larger than the outstanding balance. The difference between the mortgage balance and the amount refinanced is paid out in cash. Cash-out refinances are great for homeowners to get the funds for a down payment and lock into a lower interest rate on their current mortgage. 

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Pros:

• Lower interest rate: Refinancing allows you to secure a new interest rate based on market conditions. If you refinance when rates are lower, you could end up paying less interest on your mortgage in the long run.
• Restructured term: Refinancing also allows borrowers to restructure their loan terms based on their financial needs. Some borrowers may want to shorten the life of their loan to pay it off quicker or elongate the life of their loan to lower their monthly payments. 

Cons:

• Increased debt: Replacing your old mortgage with a larger one inevitably increases your monthly debt payments. If you plan to apply for other types of financing in the future, your DTI ratio may be too high. 
• Closing costs: Since you’ll be refinancing into a new mortgage, you’ll need to pay closing costs that are usually 3-6% of the new loan amount. 

DSCR loan

A DSCR (Debt Service Coverage Ratio) loan, also known as an investor cash flow loan, is a commercial loan available to real estate investors. Lenders base a borrower’s ability to repay the loan on the potential income generated from the property they’re interested in purchasing—not the equity in a current property.

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The loan ratio is calculated by dividing a property’s net operating income by its total principal and interest payments on the mortgage. They make sense for investors who want to buy a new property, but don’t have sufficient income or equity in a property they currently own. 

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Pros:

• Larger loan amounts: Since DSCR loans take into account property income or equity, borrowers can qualify for larger loan amounts.
• Not based on equity or income: DSCR lenders focus mostly on a property’s income potential as opposed to the borrower’s income or any equity in currently owned properties. 

Cons:

• Stricter requirements: Qualifying properties need to generate 1.2-1.5 times the debt service amount. DSCR loans also come with larger down payments, usually 25% or more of the property’s value. 
• Limited to income-producing properties: Investors with underperforming or vacant properties may not be eligible for a DSCR loan.

Final thoughts on HELOCs, bridge loans, and alternative financing options

As a homeowner, you have several financing options available to you. Choosing the right one will depend on how much home equity you have and how you’d like to receive your funds, among other factors. Carefully consider terms and conditions before deciding which financing solution is right for you. 

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Access funds for your next home purchase with a Home Equity Investment from Point. Borrowers don’t need to make monthly payments or go through excessive credit evaluations. Explore Point’s HEIs here.

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