Making a decision about your personal finances can be difficult, especially when you're not sure which option is the best one for you.
In this guide, we will compare Bridge Loans and HELOCs to help you decide which is the right choice for you. Both of these options have their own advantages and disadvantages, so it's important to understand them all before making a decision. Let's get started!
Bridge Loan Vs HELOC Table of Contents
What is a Bridge Loan?
A bridge loan is a short-term loan that is used to cover the cost of an expenses until you can secure more permanent financing.
Bridge loans are typically used when you are buying a new home before your current home is sold, or when you are refinancing your mortgage and need temporary financing to close on the new loan.
What is a HELOC?
A HELOC is a Home Equity Line of Credit. It's a second mortgage on your home, but instead of receiving a lump sum like you would with a traditional second mortgage, you're given a line of credit that you can draw from as needed, up to a certain limit.
What is The Difference Between a Bridge Loan and a HELOC?
A bridge loan is a short-term loan used to finance the purchase of a new home before selling your current home. A HELOC is a Home Equity Line of Credit, which allows you to borrow against the equity in your home.
Bridge loans are typically for six months to one year and have higher interest rates than HELOCs. HELOCs have variable interest rates and can be used for a variety of purposes, such as home improvements or consolidating debt.
Bridge loans are ideal for people who are sure they will sell their current home within a year and need the extra time to find a new home. HELOCs are best for people who have equity in their home and need a flexible line of credit.
What Are The Different Types of Bridge Loan?
There are two different types of bridge loan, the closed bridge loan and the open bridge loan. The main difference between the two is that with a closed bridge loan, you will have to make regular repayments on the outstanding amount borrowed, whereas with an open bridge loan, you only need to make interest payments.
The advantage of a closed bridge loan is that it can help improve your credit score, as regular repayments are seen as a sign of financial responsibility.
The downside is that you may end up paying more in interest over the life of the loan, as you are effectively paying off the principal and the interest at the same time.
An open bridge loan, on the other hand, can be a more flexible option as you are only required to make interest payments. This means that you can use the loan for a shorter period of time and save on interest costs.
The downside is that an open bridge loan can negatively impact your credit score as it may be seen as an indication that you are struggling to meet your financial obligations.
So, which is the better option for you? It really depends on your individual circumstances and what your financial goals are. If you need a quick injection of cash and can afford to make regular repayments, then a closed bridge loan may be the right choice for you.
However, if you are looking for a more flexible solution and don't mind taking a hit to your credit score, then an open bridge loan may be a better option.
What Are The Different Types of HELOC?
As we mentioned, HELOCs come in two different types: the home equity loan and the line of credit. The biggest difference between the two is how they’re structured.
With a home equity loan, you’re given a lump sum of cash all at once. This money can be used for anything you want, but it needs to be paid back with interest. Home equity loans usually have fixed interest rates, meaning your monthly payments will stay the same for the life of the loan.
A home equity line of credit, on the other hand, works more like a credit card. You’re given a line of credit that you can use whenever you want, up to a certain limit. You only have to pay back the money you actually borrow, plus interest. And like a credit card, your interest rate can be either fixed or variable.
What Are The Advantages of a Bridge Loan?
If you're looking for a short-term loan option, a bridge loan can be a great choice. Bridge loans can offer several advantages, including:
- They are typically easier to qualify for than traditional bank loans.
- They can provide quick access to funding.
- They can be used for a variety of purposes, including home renovations, business expansion, and more.
What Are The Advantages of a HELOC?
A HELOC is a great option if you need access to cash quickly. Unlike a bridge loan, which is a lump sum of money that must be repaid all at once, a HELOC allows you to borrow what you need, when you need it.
Another advantage of a HELOC is that it usually has a lower interest rate than a bridge loan. This is because a HELOC is secured by your home equity, while a bridge loan is not.
Lastly, a HELOC can be used for more than just purchasing a new home. You can use the money from a HELOC for home improvements, debt consolidation, or anything else you might need it for.
What Are The Disadvantages of Bridge Loan?
Bridge loan interest rates are usually higher than HELOC interest rates. The reason for this is that bridge loans are typically shorter-term loans, so the lender wants to make sure they are compensated for the added risk.
Another disadvantage of bridge loans is that they can be difficult to qualify for. This is because lenders want to see that you have equity in your home and a good credit score.
Lastly, bridge loans can be expensive. Not only do you have to pay interest on the loan, but you may also have to pay origination fees and other closing costs. This can add up quickly, so it's important to make sure you understand all of the costs before taking out a bridge loan.
What Are The Disadvantages of HELOC?
The main disadvantage of HELOC is that it's a variable rate loan. This means that your monthly payments can go up or down, depending on the prime interest rate. This can make budgeting difficult and may cause you to end up owing more money than you originally borrowed.
Another downside of HELOC is that it's a secured loan, which means that if you default on your payments, the lender can seize your home. This is a serious risk to take on, especially if you're not confident in your ability to make regular, on-time payments.
Finally, HELOC loans typically have shorter terms than bridge loans. This means that you'll need to pay off the loan more quickly, which can be difficult if you're not in a financial position to do so.
So, Which One Should You Use?
The answer to this question depends on a few factors. If you need the money for a short-term project and you have equity in your home, a bridge loan may be the better option. However, if you need ongoing access to funds and you don't mind paying interest on the money you borrow, a HELOC may be a better choice.
Of course, you'll need to speak with a financial advisor to get personalized advice on which option is best for your situation.
What Are Some Alternatives to Using a Bridge Loan or a HELOC?
If you're not interested in using a bridge loan or HELOC, there are a few other options you can explore. You could take out a personal loan from a lender, use a home equity loan, or get a line of credit from your bank. Each option has its own set of pros and cons that you'll need to consider before making a decision.
A personal loan from a lender is a good option if you have good credit and can qualify for a low interest rate. The downside of this option is that you'll need to make monthly payments on the loan, which could be difficult if you're already tight on cash flow.
Home Equity Loan
A home equity loan is another possibility, but you'll need to have equity in your home to qualify. The interest rates on these loans are typically lower than personal loans, but you'll still need to make monthly payments.
Line of Credit
A line of credit from your bank is another alternative, but it can be difficult to qualify for one if you don't have perfect credit. The upside of a line of credit is that you can use it as needed and only pay interest on the amount you borrow.
What Are Some Tips For Using a Bridge Loan?
If you're considering taking out a bridge loan, there are a few things you should keep in mind. First, be sure to shop around and compare rates from multiple lenders.
Second, make sure you have a clear exit strategy in place before taking out the loan - otherwise you could end up stuck paying high interest rates for longer than necessary.
Finally, be sure to factor in all of the costs associated with taking out a loan, including fees and closing costs.
What Are Some Tips For Using a HELOC?
A HELOC is a great tool to have in your personal finance arsenal, but it's important to use it wisely. Here are a few tips:
- Only borrow what you need and can afford to repay. A HELOC is a revolving line of credit, so you're only paying interest on the amount you've actually borrowed – not the entire line of credit.
- Make sure you have a plan for repaying the loan. A HELOC typically has a draw period (usually around five years) during which you can borrow funds, followed by a repayment period during which you must repay the loan.
- Pay attention to interest rates. HELOCs typically have variable interest rates, so they can go up or down over time. Make sure you're prepared for potential rate increases.
- Watch out for fees. Some HELOCs have annual or monthly fees, so be sure to factor that into your repayment plans.