Bridge Loan vs. HELOC: Which Should You Choose?

Updated May 22, 2023

Sometimes you need a little extra cash to help you get through a rough patch. Maybe you need the money for vital home improvements, to pay down credit card debt, or even to manage a family emergency.

Luckily, as a homeowner, you can use your home equity for quick cash.

But, how can you convert that equity to cash? The answer depends on your family’s financial situation, among other factors. This guide will walk you through the pros and cons of two popular home equity loan alternative options—bridge loan vs home equity line of credit (HELOC) as well as other bridge loan alternative options. 

What Is a Bridge Loan?

One option you can use to access your home’s equity quickly is a bridge loan, also known as a bridging loan. Bridge loans do precisely what the name implies—they build a bridge between the time you need cash and when you can access another type of financing. 

Bridge loans are typically provided by bridge lenders, who specialize in this type of short-term financing. These lenders understand the unique needs of homeowners looking to bridge the gap between their current financial situation and future goals.

To that end, bridge loans act as short-term financing when you need cash quickly for emergencies, repairs, or you can use a bridge loan for flipping houses. There are bridge loans for seniors that can also help out with assisted living or retirement. 

However, unlike a home equity loan, which is a fixed-term loan granted to a homeowner from a lender that can still be used after the old home is sold, bridge financing is usually due once your current home is sold.

For example, let’s say you are trying to sell your existing home and purchase a second home. A bridge loan would work like this:

• You would apply for a bridge loan for a specific amount of money
• The equity you have in your current home would be the collateral for the bridge loan
• You could use the cash from the bridge loan as a downpayment on the new home
• When your old house sells, you’d use the profit to pay off the bridge loan

So, what are the pros and cons of bridge loans?

Bridge Loan Pros

The ability to quickly access cash is the biggest advantage of bridge financing. Along with this, a bridging loan will also provide you with:

• Cash for emergency repairs
• The ability to close on a property without waiting for a home sale
• Time to make other financial arrangements

Bridge Loan Cons

As a borrower, a bridge loan isn’t always ideal for your financial situation. That being said, the disadvantages of a bridge loan include:

• Higher interest rate compared to conventional mortgages
• High closing costs
• Short pay-back periods
• Two monthly payments if you’re still paying an existing mortgage

Additionally, if you are using a bridge loan during a transitional period between an old and new home, you may find yourself in a precarious financial situation if you’re unable to sell your first home within the loan term. 

HELOC is an acronym for a home equity line of credit. The most significant difference between a bridge loan vs HELOC is the way you access the equity from your home. 

A HELOC doesn’t provide you with all of the funds right away. Instead, a HELOC creates an open line of credit from which you can draw money as needed. Similar to a bridge loan, your home acts as collateral for the line of credit. 

When determining whether a HELOC is right for your financial situation, consider the following:

• They’re typically capped at about 85% of the equity you have in your home
• Monthly payments vary, depending on how much of the credit line you use
• You only pay interest on the credit you use

Some of these features make HELOCs more appealing options than bridge loans, especially if you need more flexibility regarding fund availability and access. 

HELOCs Pros 

In addition to financial flexibility and an open line of funds, a HELOC can also provide you with:

• Lower interest rate compared to conventional mortgages
• Refinancing options
• Low closing costs
• Tax advantages

HELOCs Cons

While a HELOC can provide numerous financial benefits, you should consider the following before qualifying for a line of credit:

• Some HELOCs have variable interest rates 
• You risk losing your home if you can’t make your monthly payments
• HELOCs are another form of debt that you have to repay
• Sometimes there are large, lump payments due at the end of the financing terms

In summary, HELOCs can give you some flexibility in the amount of equity you access and how you use it. However, be mindful of the fine print and make sure that you don’t use more than you can afford to pay back to avoid putting your existing home at risk.

Sale-Leasebacks: An Alternative Financing Option for Both

When looking for short-term financing and comparing a bridge loan vs HELOC, both are each viable options. However, each requires using your home as collateral. If you’re looking for an alternative and personalized financing option that meets your specific needs, consider looking into sale-leasebacks.

Sale-leaseback solutions allows homeowners to sell and remain in their homes until they are ready to move. These real estate transactions can serve as an option whether you’re looking to purchase a second home, pay off debt, or get ahead of retirement planning. They also don’t come with any predatory credit score requirements as some real estate options do.

Key Takeaways

There are many things to consider when comparing a bridge loan vs a HELOC including interest rates, closing costs, tax advantages, and more. Speak with a financial advisor to figure out which option is best for you. If you don’t want to use your home as collateral, look into alternative financial solutions like sale-leasebacks.

Additionally, don’t forget to explore other options such as a cash-out refinance, which allows you to replace your current mortgage loan with a new home loan for a higher loan amount, giving you the difference in cash. This option could be beneficial if you have built up substantial equity in your home and have a good credit score.

Sources: 

Forbes. Is a Bridge Loan Right for You? https://www.forbes.com/advisor/loans/bridge-loan/

Federal Trade Commission. Home Equity Loans and Credit Lines. https://www.consumer.ftc.gov/articles/0227-home-equity-loans-and-credit-lines