Whether it’s for your personal plans or part of your business strategy, there are times you might need quick financing for a short period. This is known as bridge financing.
Many borrowers will seek out a traditional lender to secure a bridge loan. However, many find that conventional banks’ loan requirements and processing timelines make it too complicated and far too slow.
Bridge financing can be achieved in many ways, but HELOCs are often one of the fastest and easiest solutions available.
To show you what we mean, we’ll compare HELOCs vs bridge loans and highlight why a HELOC is often the superior choice for bridge financing, especially when you want flexibility, cost-effectiveness, and convenience.
Start HomeEQ’s quick and simple HELOC application.What is bridge financing?
Bridge financing refers to short-term funding. These loans can help homeowners manage cash flow during various transitions, such as:
- Buying a new home before the sale of an existing property is complete
- Covering unexpected costs related to real estate transactions
- Financing home improvements to increase the value of a property before selling
In technical terms, bridge financing provides ‘temporary liquidity,’ ensuring smooth financial transitions.
HELOC vs bridge loan: Understanding the options
Before diving into why a HELOC is better for bridge financing, let’s define each option and how they work.
What is a HELOC?
A Home Equity Line of Credit (HELOC) allows you to leverage the equity you’ve paid into your home, acting like a revolving line of credit. You have access to funds as needed, with repayment flexibility.
Key features of a HELOC include:
- Revolving credit: Borrow only what you need, up to a set limit, during the draw period.
- Interest-only payments: During the initial period—also called the draw period—you can choose to pay only the interest on the borrowed amount.
- Lower interest rates: HELOCs typically offer competitive rates compared to other short-term financing options.
What is a bridge loan?
A bridge loan is designed to be a short-term loan to “bridge” a funding gap—usually between purchasing a new property and selling an existing one.
Typically secured by your current home, bridge loans offer a lump sum upfront with repayment due in a few months to a year.
Key features include:
- Lump-sum payment: Borrow the full amount you need at once.
- Higher interest rates: Bridge loans often have higher interest rates than HELOCs.
- Short repayment term: These loans are designed to be repaid quickly, often requiring a balloon payment at the end of the term.
Why a HELOC is best for bridge financing
While both HELOCs and bridge loans serve similar purposes, HELOCs offer significant advantages for bridge financing.
Flexibility in borrowing and repayment
HELOCs provide unmatched flexibility. You can withdraw funds as needed, which is especially beneficial for covering unpredictable costs like:
- Down payments
- Moving expenses
- Home repairs
Unlike a bridge loan, which provides a fixed lump sum, a HELOC allows you to borrow only what you require, saving on unnecessary interest.
Additionally, HELOC repayment terms are more flexible, often allowing interest-only payments during the draw period.
In contrast, bridge loans typically have strict repayment timelines and may require a large lump-sum repayment at the end.
Lower interest rates
One of the most compelling reasons to choose a HELOC for bridge financing is the lower cost of borrowing.
HELOCs generally feature lower interest rates than bridge loans, often considered high-risk by lenders. This can result in significant savings throughout your financing period.
Longer draw periods
Bridge loans are designed for short-term use, with terms typically ranging from 6 months to 1 year. If your home sale or transition takes longer than expected, you could face repayment stress before securing funds from your property sale.
In contrast, HELOCs offer longer draw periods, often 5–10 years, giving you more time to access funds and manage repayment.
No need for immediate home sale
Bridge loans require you to sell your current property quickly to repay the loan. This can put unnecessary pressure on homeowners, potentially forcing them to accept lower offers to meet repayment deadlines.
A HELOC eliminates this urgency, allowing you to take your time selling your home. This is especially valuable if you aim to maximize your property’s value or wait for favorable market conditions.
Lower upfront costs
Bridge loans often come with higher upfront fees, including origination, appraisal, and administrative costs. These costs can add up, reducing the financial benefits of the loan.
However, HELOCs tend to have lower or even no upfront fees, making them a more cost-effective choice.
How to use a HELOC for bridge financing
If you’re considering a HELOC for bridge financing, here’s how to get started:
- Assess your home equity: Determine how much equity you have in your current home—most lenders allow you to borrow a maximum of 80%–90% of your home’s value minus any existing mortgage balance.
- Choose a reputable lender: Select a lender like HomeEQ, which offers a secure and straightforward HELOC application process and a platform designed to provide fast approvals and transparent terms.
- Plan your budget: Estimate the funds you’ll need for your transition, such as the down payment on your new home or moving expenses—borrow only what you need to minimize interest costs.
- Use funds strategically: Withdraw HELOC funds for essential expenses, such as covering the down payment on your new property or renovating your current home to enhance its market value.
- Repay promptly: Once your current home is sold, use the proceeds to pay down your HELOC balance to ensure you’ll minimize long-term interest costs.
Bridge loans vs. HELOC | The wrap-up
Regarding bridge financing, a HELOC offers the flexibility, affordability, and convenience that homeowners need during transitions.
Unlike bridge loans, which can be costly and restrictive, HELOCs provide a practical and cost-effective way to access your home equity.
Ready to explore how a HELOC can help you manage your financial transitions? Fill out our fast and simple HomeEQ application form, and we’ll tell you in minutes if you’re approved for a HELOC.