Bridge loan vs. HELOC
Quick insights
- A bridge loan may be good for short-term financing when you want to move, while a HELOC is a flexible long-term borrowing option that uses your home equity.
- Homeowners often use bridge loans to buy a new home before selling their current one. HELOCs are commonly used for home improvements, debt consolidation or other expenses.
- Because they serve different purposes, bridge loans and HELOCs can have very different interest rates and repayment periods.
A bridge loan can give you a lump sum of money specifically designed to finance a new property purchase while you wait for your current home to sell. A home equity line of credit (HELOC) offers you a flexible, revolving borrowing limit based on your existing home’s equity. You can draw funds as needed over an extended period before repaying them. As you plan a financing strategy, you might weigh a bridge loan’s purpose and terms against a HELOC’s long-term borrowing flexibility to meet your goals.
What is a bridge loan?
A bridge loan is a short-term loan is designed to bridge the gap between buying a new home and selling your current one. This loan is temporary financing, so you don’t have to wait for your existing home to sell before making a home purchase.
Bridge loans are typically secured by your current home and usually repaid within 6 to 12 months. Some lenders may offer terms up to 18 months. These loans are designed for a specific, short-term purpose, so they generally have higher interest rates than other home loans.
Common uses:
- Buying a new home before selling your current one
- Covering a down payment and closing costs
- Making a stronger offer by removing a home sale contingency
- Managing the timing between two real estate transactions
What is a HELOC?
A HELOC is a revolving line of credit that lets you borrow against the equity you've built in your home. Instead of receiving one lump sum, you’re approved for a credit limit and can withdraw money as needed during the draw period, often 3 to 10 years. This is followed by a repayment period of 10 to 20 years. Interest rates are often variable, meaning they can increase or decrease as you repay what you borrow.
Terms and periods vary by lender and product. The ranges above are examples and may not reflect what you qualify for.
Common uses:
- Home renovations
- Debt consolidation
- Emergency expenses
- Education costs
- Large purchases
Bridge loan vs. HELOC: Key differences
Bridge loans and HELOCs differ primarily in purpose, structure and repayment style. While terms vary by lender, here are some of the major differences between each borrowing option.
Primary purpose:
- Bridge loan: Helps finance the purchase of a new home before selling your current one
- HELOC: Provides flexible access to your home equity for a variety of expenses
How you receive funds:
- Bridge loan: Typically as a lump sum
- HELOC: Borrow only what you need, when you need it, up to your approved credit limit
Repayment term:
- Bridge loan: Usually 6 to 12 months, sometimes up to 18 months
- HELOC: Typically includes a 3- to 10-year draw period followed by a 10- to 20-year repayment period
Interest rate:
- Bridge loan: May be relatively high because the loan designed for short-term financing
- HELOC: May be lower than bridge loans but is typically a variable rate
Good for:
- Bridge loan: Buying a new home before selling your current home
- HELOC: Ongoing borrowing needs and long-term financial flexibility
The main uses:
- Bridge loan: Purchasing a new home and covering associated costs while you move and sell your current home
- HELOC: Home improvement projects, debt consolidation, education costs and emergency home repairs
Alternatives to HELOCs and bridge loans
Because HELOCs and bridge loans may help you in distinct situations, alternative financial solutions may be worth exploring. Here are several examples that might fit different situations and goals:
- Home equity loan: Borrow a lump sum against your home equity and repay it with fixed monthly payments, making it a good option for one-time expenses.
- Cash-out refinance: A cash-out refinance replaces your current mortgage with a larger one, and you receive the difference in cash.
- Personal loan: Borrow without using your home as collateral, though interest rates are often higher than home equity financing. Chase does not offer personal loans.
- Savings or investments: Using available cash may help you avoid interest charges and loan fees if you have enough liquid assets.
In summary
Bridge loans and HELOCs both allow homeowners to leverage their home equity for a financing solution. However, these products are designed for different situations. A bridge loan is generally a suitable loan option when you need short-term financing to buy a new home before selling your current one. A HELOC offers flexible, long-term access to funds for a variety of expenses. Comparing how each option works can help you choose the financing solution that best fits your personal goals and financial situation.
