Bridge Loan vs. HELOC: What’s the Difference?

Article Summary:

Bridge loans and HELOCs are short-term financing tools that are often used by real estate investors. Homebuyers who are considering whether they should go with a bridge loan vs. HELOC are typically trying to buy a new property while they have yet to sell an existing one. There are important factors to consider when comparing the two, including loan structure, time frame, interest rates, and restrictions.

Bridge loans and HELOCs can be a great tool for homebuyers in hot markets who need to be able to move fast to buy a home. In many cases, homebuyers need to sell before they can finalize the purchase of a new home. Bridge loans and HELOCs can provide them with the short-term financing options they need to “bridge the gap.”

What are bridge loans and HELOCs?

Bridge loans and HELOCs are two short-term loan options that give a buyer cash to use for a purchase. A bridge loan, simply put, is a very short-term loan with a high interest rate.

A home equity line of credit (HELOC for short) works a bit differently: this loan requires collateral drawn from the equity in your current home. HELOCs are relatively safer for the lender, and thus the time frame, interest rate, and restrictions are comparatively lighter.

Depending on your current situation, it’s worth weighing your loan options before you decide which one is best for you.

Bridge loans 101

Bridge loans, also known as bridging loans or interim financing, are used by consumers and businesses to cover an immediate expense. These loans are typically issued on a short-term basis, and because of the higher risk involved, they come with higher interest rates.

A bridge loan is contingent on the borrower promptly selling another asset or otherwise obtaining permanent financing to pay back the loan. For instance, a bridge loan can be issued to a trading company in need of cash flow based on the value of the freight being transported on one of the company’s ships.

Bridge loans can serve multiple different purposes. However, they are most commonly used in real estate.

How bridge loans are used in real estate

Bridge loans are a popular option for quick real estate purchases. These are mostly used by homebuyers who want to buy a new home while still in the process of selling their current one. Features that bridge loans have in common include a high interest rate, certain restrictions, and a short loan time frame.

Here are some of the most common ways bridge loans are used in real estate:

Buying property

If you’re looking to finance a mortgage, you’ll need to start with a down payment. However, if your money is tied up in the existing home you’re still trying to sell, you may find it difficult to scrape that down payment together. That’s where a bridge loan can help you. A lender will issue you a bridge loan based on the perceived success of quickly selling your existing asset (i.e., your current home).

Construction loans

Developers will sometimes seek out bridge loans if the project they are working on is still in the planning phase or is being held up. Due to the incomplete nature of a project under development, a lender will typically offer a specialized bridge loan to invest in the property at a high interest rate for a short period of time. Once construction is approved, the developer will likely be able to access the money tied into the project or take out a construction loan to pay off the bridge loan.

Off-plan properties

Some investors prefer to buy real estate “off the plan.” This is when investors buy a property before it is built. They will put down a deposit, then pay the rest of the money when the project is completed and the property is available on the market.

Sometimes, investors will look to complete their purchase through mortgage financing. If the paperwork or timeline on the mortgage does not line up with the final construction of the property, they will need to borrow money in the form of a bridge loan to complete it.

Looking to buy a new home, either off the plan or move-in ready? Here are some of the best mortgage providers who can help you finance your dream home.

HELOCs 101

Home equity lines of credit work slightly differently than bridge loans. While both technically use collateral, with a HELOC, you get a line of credit based on the equity of an existing asset — in this case, your current home.

Say, for instance, you bought your house for $100,000. You put $20,000 down and borrowed $80,000 from the bank. That home is now worth $200,00. Assuming you have an interest-only mortgage with interest-only payments, your equity in the property would be the $20,000 you put down plus the $100,000 increase in the home’s value, or $120,000.

In this case, a lender may give you a HELOC of up to $100,000. Effectively, this means you have $100,000 available to use whenever you wish. Because the loan is backed up by equity in an existing asset, the interest rate will be much lower and the terms much more forgiving than with an unsecured loan.

Typically, home equity lines of credit have interest rates similar to mortgages, and the time frame to pay back the loan can be up to 10 years. As opposed to a bridge loan, in which you must receive a total lump sum all at once, a HELOC allows you to withdraw the money whenever you want. Furthermore, the loan will not have as many restrictions on how you are able to use the funds.

How HELOCs are used in real estate

Like a bridge loan, a home equity line of credit can be used for a number of investments because it uses the equity in an existing asset as collateral, but it is most commonly used for real estate. Here are some examples of how to use a home equity line of credit for real estate:

Buying a new home

Although a bridge loan can be useful, a HELOC is usually a better option for financing a new home. You can draw funds from your HELOC to cover a down payment, and the benefit here is that you don’t have to receive all the money at once. If your HELOC is $200,000 but the down payment for your new property is only $50,000, you can withdraw only the necessary $50,000, and the untapped funds won’t charge interest.

Starting a business

Despite their name, home equity lines of credit can be used for much more than buying a home. If you are looking to start a business, you can use the funds from a HELOC to cover your startup costs. All you need is a valuable asset to use as collateral, and you can withdraw money from your equity line of credit whenever your business needs additional cash flow.

Pro Tip

If you have credit card debt (or any other debt), it might be smart to use a HELOC to pay it off. Credit cards and other types of debt usually come with higher interest rates than HELOCs, so using this strategy will make it much easier to pay down your debt in a shorter amount of time.

Bridge loan vs. HELOC

While they are similar in many ways, there are also some major differences between a HELOC and a bridge loan. Here are some of the key differences:

Bridge LoanHELOC
Interest RateHigherLower
Time FrameOne to two years maxUp to 10 years
Loan StructureLump-sum onlyCan be withdrawn from when needed
RestrictionsLimited to single-purpose purchasesCan be used for a variety of purchases or investments

Interest rates

HELOCs will almost always have lower interest rates than bridge loans. This is because a bridge loan is contingent on an event that has yet to occur, such as the sale of a property, whereas a HELOC uses collateral in the form of equity in an existing asset, usually your house. The interest rate on a home equity loan will often match (or at least closely mirror) a normal mortgage rate, while the interest rate on a bridge loan will most likely be a few points higher.

Time frame

Bridge loans typically have a very short time frame in which they must be paid back — one to two years. In fact, most bridge loans are issued with the expectation that the lender will be paid back in only a few months. HELOCs, on the other hand, have much longer time frames: the line of credit can be taken out for up to 10 years.

Loan structure

A lender will always issue a bridge loan in a lump sum — if you need $20,000 for a down payment on a property, you’ll receive a loan of $20,000. In contrast, a HELOC is, by definition, a line of credit. At any time, you can borrow any amount you want against that line of credit — even if your HELOC is for $100,000, you can withdraw only the $20,000 you need for your down payment.

Restrictions

Bridge loans are issued for a single specific purpose. In most cases, that purpose is to buy a home, with the loan contingent on the pending sale of another home. HELOCs, however, can conceivably be used for any purpose (within reason). Even if the investment you’re planning to make is not related to real estate, a HELOC could be a viable option to help you finance it.

FAQs

What are the cons of a bridging loan?

The cons of a bridging loan are the high interest rate, limited withdrawal structure, short time frame, and restrictions on how to use the funds.

When would you use a bridge loan?

The most common use of a bridge loan is in real estate. If you are buying a house but have not yet sold your current home, a bridge loan can help you cover the down payment. You would then pay back the loan after selling your existing home.

What is an equity bridge loan?

An equity bridge loan is a short-term loan based on the intended value and use of other assets.

What is the disadvantage of a HELOC?

The main risk of a HELOC is overspending. Make sure to only withdraw what you need from a HELOC, and always keep track of your available amount of credit, or else your rate will go up and you’ll end up with high monthly payments.

Key Takeaways

  • Bridge loans and HELOCs are short-term financing options that allow you to borrow money for a short period of time, typically for buying property.
  • Bridge loans are short-term loans with high interest rates and a limited loan structure.
  • HELOCs are home equity loans that let you borrow money against equity in an existing asset, usually your home.
  • Bridge loans and HELOCs are most commonly used in real estate but can also be used for other types of investments.
  • HELOCs and bridge loans have different interest rates, time frames, restrictions, and withdrawal structures.
View Article Sources
  1. What you should know about Home Equity Lines of Credit – Consumer Financial Protection Bureau
  2. What is a Home Equity Line of Credit (HELOC)? – Federal Trade Commission
  3. Bridge Loans – Maine Consumer Credit Protection