A bridge loan and a home equity line of credit (HELOC) are two options for short-term financing when you need temporary funding. For example, a HELOC or a bridge loan can help you cover your down payment if you sell one home and buy another.
Using a bridge loan vs. HELOC for a down payment can depend on your financial situation. Breaking down the differences can help you to decide which might be the better option.
In this guide:
- What is a HELOC?
- What is a bridge loan?
- Is a bridge loan more expensive?
- Do I have to start repaying one sooner?
- How do repayment terms differ?
- Is a HELOC easier to qualify for than a bridge loan?
- How many payments will I make each month with a HELOC vs. a bridge loan?
- Is the approval process faster for one?
- Can I apply for a HELOC or bridge loan after I’ve listed my home for sale?
- Do I need to repay a HELOC and a bridge loan in full when my house sells?
What is a HELOC?
When you take out a HELOC, you borrow against your home equity. Your equity is the difference between what you owe on the mortgage and your home’s current fair market value.
A HELOC is a revolving credit line, similar to a credit card. You can draw against your available credit as needed and only pay interest on the part of the credit line you use.
HELOCs’ characteristics include:
- Your home equity is one factor in your credit limit.
- Interest rates are often variable, though certain lenders offer a fixed-rate option.
- In most cases, the draw period lasts five to 10 years, followed by a 20-year repayment period.
- Access via a debit card, paper checks, or online transfers to a linked bank account.
- Funds are flexible, and you can use them for any purpose.
- Closing costs may apply.
- Your home secures the credit line.
Most HELOC lenders look for borrowers with a loan-to-value (LTV) or combined LTV (CLTV) ratio of 85% or less. Loan-to-value measures the amount you owe on the home relative to its value. Combined LTV measures the value of all secured loans against a home’s value, including home equity loans.
Lenders use LTV to determine whether you have sufficient equity for a HELOC. To calculate LTV, divide the current mortgage balance by its appraised value. For example, a mortgage balance of $150,000 divided by an appraisal value of $300,000 gives you an LTV of 50%, which could make you eligible for a HELOC if your lender’s maximum allowed LTV is 85%.
Find out more about how to calculate your home equity.
You might use a HELOC to make a down payment on a home if you’re trying to sell your current home. Rather than dipping into cash reserves, you could use your HELOC to complete the purchase. You would then use money from the sale of the old home to pay off the line of credit.
What is a bridge loan?
A bridge loan is a temporary, short-term loan often used in real estate and business transactions. The loan acts as a “bridge,” providing financing that you repay within a short time—12 months, for instance.
The features of bridge loans include:
- Get a lump sum rather than access to a revolving credit line.
- Interest rates may be several points higher than HELOC or traditional mortgage rates.
- The property you own secures the loan.
- May repay in installments or a single balloon payment at the end of the term.
- Lenders may require a CLTV of 80% or less to qualify.
You need equity in your home to get a bridge loan. It’s wise to calculate your equity and estimate your down payment needs before applying to gauge how much you might be able to borrow.
You can use a bridge loan to fund a down payment on a new home. Depending on the loan’s structure, you might make payments during the loan term or only once you sell the home.
Is a bridge loan more expensive than a HELOC?
Compared to HELOC rates, bridge loans are often a more expensive way to borrow based on the interest rate. For example, our research found that a borrower who qualifies for a HELOC at 7.94% APR may also qualify for a bridge loan at 10% APR.
However, as you can see in the table below, if you make the minimum payments on a HELOC, you’ll often pay much more in interest over the long term.
You might pay closing costs on both a bridge loan and a HELOC. The typical closing cost range for mortgage loans is 2% to 5% of the loan amount. If you get a $50,000 bridge loan, you might pay closing costs of $1,000 to $2,500.
Standard fees for both a bridge loan and a HELOC include the following:
- Appraisal fees to determine the property’s value
- Attorney’s fees
- Credit check fees
- Notary fees (if your state requires notarization)
- Recording fees
- Title search fees
You might also pay an origination fee with either type of loan to cover the cost of initiating and underwriting the loan.
A favorable credit score could help you qualify for the lowest rates available. The minimum credit score needed for a HELOC vs. a bridge loan can depend on the lender.
Do I have to start repaying a HELOC or bridge loan sooner?
HELOCs have an initial draw period in which you access your credit line. The draw period for most HELOCs is five to 10 years. You may make minimum or interest-only payments toward your balance during this period.
Once the draw period ends, you enter the repayment phase. Repayment often extends for 20 years as you make interest and principal payments.
Bridge loan repayment depends on the terms of the loan agreement. You might start with minimum or interest-only payments, with one large balloon payment due at the end of the loan term. Your lender might also structure the loan with no payments due until you sell the home, at which time you’d pay the balance in full.
How do repayment terms differ between a HELOC and a bridge loan?
If you’re taking out a HELOC, you might have 10 years to use it and another 20 to pay it off. You’ll often have the option to delay paying the principal until the draw period ends.
With a bridge loan, you may or may not make monthly payments, depending on how the loan is structured. However, you have a much smaller window in which to repay the loan. Bridge loan terms frequently range from six to 36 months versus the much longer time frame you have to pay off a HELOC.
Here’s an example of your monthly payment and the total interest you’d pay for a $50,000 HELOC vs. a $50,000 bridge loan, assuming a fixed rate of 7% for each.
|$50,000 HELOC||$50,000 bridge loan|
Total interest paid
$291.67 (draw period);
| 7% APR|
The monthly cost of a bridge loan is higher because of its shorter repayment term.
But as we mentioned above, if you measure the costs of a HELOC vs. bridge loan by the total interest paid, the HELOC has a much higher out-of-pocket cost overall. Note that these figures do not include anything you may pay for closing costs or other fees.
Is a HELOC easier to qualify for than a bridge loan?
With a HELOC or bridge loan, the primary consideration for eligibility is how much equity you have. You may need an LTV or CLTV in the 80% to 85% range or less to qualify for either.
Lenders will also consider other factors, such as credit scores and income, when you apply for a bridge loan or HELOC. In terms of which is easier to get, it often depends on the lender. For example, you might be able to get approved for a HELOC or bridge loan with a credit score in the 620 range.
HELOC and bridge loan lenders tend to be most interested in lending to borrowers who:
- Are financially stable
- Have a good track record of responsible borrowing
- Can show proof of consistent income
If you lack any of these, or your LTV ratio does not meet the lender’s requirements, it may be more challenging to get approved for a bridge loan or a HELOC. It’s also important to note that market conditions matter for bridge loan approval. If a lender has reason to believe your current home may not sell, they could deny you a bridge loan to buy a new home.
You can apply for a HELOC or a bridge loan online. You’ll need to submit your personal information and the lender’s required documentation.
Documents you might need include:
- Valid photo ID
- Pay stubs or W-2s
- Tax returns
- A profit and loss statement or balance sheet if you’re self-employed
- Bank statements
- A copy of your homeowners insurance policy
- Flood insurance certification if you live in a flood zone
With either a HELOC or a bridge loan, it may be wise to get preapproved to see the rates and loan terms you can qualify for.
Here’s one more item to consider: You may only be able to get a bridge loan if you also agree to take out a new mortgage loan to buy your next home.
How many payments will I make each month with a HELOC vs. a bridge loan?
The number of monthly payments you’d need to make toward a HELOC or a bridge loan to fund a down payment can depend on how fast you sell your home and purchase a new one.
Let’s say your home is on the market for 12 months before it sells. During that time, you’d have to pay your regular mortgage and the monthly payment toward your HELOC or bridge loan. That’s 24 payments in total.
Now, assume you buy a new home in month 10. For months 11 and 12, you’d have three payments:
- Final payments due on the old property.
- HELOC or bridge loan payment on the old home.
- Mortgage payment on the new home.
The old mortgage payment and HELOC or bridge loan payment would go away once the old home sells. But you may find yourself servicing multiple mortgage debts for a while, so consider your budget to make sure you can afford it.
Is the approval process faster for a HELOC or a bridge loan?
HELOCs and bridge loans follow the same timeline when you’re using home equity as collateral because the lender needs time to review your creditworthiness and determine the home’s value.
You can expect it to take up to six weeks to get approved for a HELOC or bridge loan, though the process can move faster. Neither is ideal if you need fast funding. Consider a personal loan instead if your mortgage lender allows it. Some lenders offer same-day approval and next-day funding.
Can I apply for a HELOC or bridge loan after I’ve listed my home for sale?
Most lenders won’t approve you for a HELOC if you’ve already listed your home for sale. They know that if the home sells quickly, you’d likely pay off the line of credit immediately.
In that scenario, the lender misses out on the chance to collect the total interest you’d otherwise pay. If you’re considering funding a down payment on a new home purchase with a HELOC, you’ll need to apply and get approved before you list the property.
Bridge loans may offer more flexibility. Some lenders are more willing to approve you even if the home is already on the market.
Researching HELOC and bridge loan lenders can help you to find the right option to fit your timeline for selling your old home and buying a new one.
Do I need to repay a HELOC and a bridge loan in full when my house sells?
HELOCs and bridge loans don’t follow you; they stay with the home. Once you sell your home, you’ll repay the HELOC or bridge loan out of the sale proceeds.
That allows you to move into your new home without added debt payments. If you’re repaying a HELOC early, read the fine print to see if a prepayment penalty applies. That could reduce the sale proceeds you get to keep once you pay off the HELOC.
For more information about HELOCs, read our resource, “What Is a Home Equity Line of Credit?”
View our article about how bridge loans work to explore the topic further.