Choosing A Bridge Loan Vs. A HELOC: What’s Right For You?

Depending on the market you’re looking to buy in, real estate can be quite competitive. You may find yourself buying and selling a house at the same time to jump on the right home while you have the chance. But people often fund their down payment from the sale of their existing home. Bridge loans or home equity lines of credit (HELOCs) can provide viable financing here.

Although Rocket Mortgage^® offers neither bridge loans nor HELOCs, we do want you to be aware of both these options and some traditional alternatives.

What Is A Bridge Loan?

A bridge loan is short-term financing meant to cover temporary funding shortfalls while you’re in the process of securing more permanent funding. These loans, which tend to be less than a year in length, are used for a variety of purposes including not only real estate, but also expansion of commercial business ventures.

In real estate, the most common use of bridge loans is when a home buyer is moving out of one house while buying another. If the purchase of your new home closes before the sale of your prior one, a bridge loan using the prior home as collateral would help someone cover the down payment.

While there are various repayment structures we’ll get into later on, the intention behind these loans is that they’re paid off once you secure your permanent loan or sell the prior property. There are also scenarios in which this type of loan might be used to secure a plot of land for the building of the new home while you work toward a longer-term construction loan.

What Is A Home Equity Line Of Credit (HELOC)?

A HELOC is a line of credit based on the equity you have in your home. It’s split into two distinct payment periods. During the draw period, a HELOC works like a credit card. For example, during the draw period, you can use a HELOC to make a down payment and pay back the balance in order to access the funds later on for a home renovation.

During the draw period, you’re only required to make interest payments. Once the second part of the term kicks in, your balance freezes and you make payments of principal and interest. Although the length of the term can vary, if you had a 30-year HELOC, there might be a 10-year draw period followed by a 20-year repayment period.

What’s The Difference Between A Bridge Loan And A HELOC?

If you’re trying to decide between a bridge loan and a HELOC, there are several major factors you should consider.

Length Of The Term

While the term length on bridge loans can vary quite a bit, it’s generally a safe bet that it’s going to be less than a year. When thinking about a HELOC, you might have a 20- or 30-year term with a draw period at the beginning of the loan while the balance is frozen the remainder of the time for repayment.

Interest Rates

While they may come with fixed rates, it’s more common for both bridge loans and HELOCs to come with rates that are adjustable. In fact, because they act more like a credit card, HELOCs tend to have rates that are variable and continually adjust with the market based on factors like the federal funds rate.

The other thing to keep in mind when it comes to interest rates is that bridge loans will often have higher rates than HELOCs because bridge loans have shorter terms and there’s additional risk associated with you potentially not being able to pay it off if you can’t secure the permanent financing, closing the gap the bridge loan was originally intended to cover.

Repayment Structure

The details associated with a bridge loan can vary widely from lender to lender. Sometimes they’re customized based on the situation of the borrower as well.

As such, you may have to make payments only on the interest or the payment may be due when you secure your permanent financing. You could also have fixed monthly payments, a balloon payment at the end or some combination of any of this.

Credit Score Requirements

The credit score requirements for both HELOCs and bridge loans are going to be higher than they would for a primary mortgage. Because a HELOC is a traditional second mortgage offering, the primary lienholder gets paid first if you default and there’s higher risk. You’re looking at a credit score requirement in the upper 600s.

A bridge loan presents even higher risk because it’s a shorter-term loan that relies on you eventually securing other financing. You want to be in the mid-700s for credit.

Bridge Loans Vs. HELOC Financing: At A Glance

Alternatives To HELOCs and Bridge Loans

Although a bridge loan or a HELOC can be a good option for short-term financing needs, there are other options that are available to you. Let’s run through some alternatives:

• Cash-out refinance: In some cases, it may make sense to do a cash-out refinance on the basis that the rate you get on a primary mortgage is going to be lower than you could get for either a bridge loan or HELOC or anything else we’re about to go over. However, you’ll want to do what’s called a blended rate calculation because it may make more sense not to touch the rate you currently have in your primary mortgage depending on the amount you want to borrow and the rate you can get on other types of loans.
• Home equity loans: A home equity loan is a second mortgage like a HELOC, except that you get the money in one lump sum payment, similarly to a cash-out refinance. This could be a good option if you know exactly how much you want to borrow, but that blended rate calculation is going to come in to play again.
• Hard money loans: A hard money loan is like a bridge loan in that targeted for short-term financing. But it’s not based on creditworthiness and is reliant entirely on the value of the collateral. This means some of the highest rates and it’s considered a loan of last resort.
• Construction loans: Construction loans are specifically targeted at those building new homes. You may need a higher credit score for these, and they tend to be disbursed incrementally as the project goes through various stages of development. Rocket Mortgage doesn’t do construction loans.
• Personal loans: Personal loans are based entirely on the creditworthiness of the borrower. Because there’s nothing the lender has for collateral if you default, these rates are higher than many of the collateral-based loans.
• Temporarily make two mortgage payments: If you have the money for a down payment and can afford it, it could make the most sense to just continue with two mortgage payments in the short term as you wait to sell your current house. This wouldn’t involve taking out any new loans, but your existing mortgage payment would be included in your debt-to-income ratio while you qualify for your new home.

The Bottom Line

Both bridge loans and HELOCs could be useful alternatives if you’re trying to buy a new home and sell your old one at the same time. The main difference is that a bridge loan is much more short-term and because of that, the interest rate tends to be higher. A HELOC has a draw period during which you can pay the money back with only interest and take it out again for other projects. Once the balance freezes, the repayment period is similar to a traditional mortgage.

There are many potential alternatives to these options, including Home Equity Loans and cash-out refinances.¹ If you’re interested in either of these, or in getting an initial mortgage approval to buy a home, you can start an application.

¹ Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 2/5/2024 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00. Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Schwab products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher priced loans are not allowed on properties located in New York. Additional restrictions apply. This is not a commitment to lend.