Whether it’s a medical or family emergency, home improvements or a vacation, there are times when you need extra funds.
Fortunately, as a homeowner, you can use your home equity to get cash quickly.
What's in this article?
You can meet your immediate short-term financial requirements with the aid of short-term financing such as a bridge loan or a home equity line of credit.
Bridge loans and home equity lines of credit (HELOCs) are two short-term financing options. Read on to learn more about the similarities and differences between bridge loans and HELOCs and which of the two is better for you and your family’s needs.
What is a bridge loan?
A bridge loan is a kind of short-term financing that allows homeowners to borrow money on a flexible schedule for up to a year.
Bridge loans—also known as bridging financing, interim financing, gap financing and swing loans—are backed by collateral like a house or other assets.
Though interest rates can sometimes be high due to the short loan term, bridge loans are helpful, for example, when you’d like to purchase a new home before your old one has sold.
Until the present property is sold, this short-term financing allows you to cover your debt obligations on two mortgages and the additional costs related to buying and moving into a new home.
Compared to conventional loans, bridge loan application and underwriting processes are typically quicker. Due to this, bridge loans are a common solution for homeowners who need quick access to funds to buy a new home before they have sold their existing one.
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What is a HELOC?
A HELOC is a type of second mortgage loan that functions like a credit card.
A HELOC allows you access to money based on your home equity. You can continuously use the line of credit during the draw period (the agreed-upon period of time during which funds can be withdrawn) up to the credit limit; in this regard, a HELOC is similar to a credit card.
The key distinction is you’re taking out a loan against the equity built in your house.
You can use all of the available credit, spend as much or as little as you like and only be charged interest on the amount you actually use. This sets it apart from an installment loan, such as a personal loan or a home equity loan, where you get the entire loan amount up front.
Can a bridge loan and HELOC be used in the same way?
Homeowners can borrow money using their homes as security through bridge loans and HELOCs, but they cannot be used in the same way
While both loans give the borrower money based on the amount of equity they have in their homes, they differ in how those funds are used, among other things.
Bridge loans are tailored for costs and expenses associated with buying a new property, like closing costs. HELOCs, on the other hand, can be used for a variety of things, such as paying for college, remodeling your house, starting a business and meeting other financial demands.
HELOCs also have the advantage of being less expensive and potentially tax deductible. On the other hand, a bridge loan is a high-risk, short-term financing option with a payment you make in addition to your monthly mortgage payment and typically features higher interest rates and additional costs.
The fact that a bridge loan is disbursed in one single payment is crucial if you require a lump sum, but you’ll need to start paying for it right away in contrast to a HELOC, which offers the borrower a fixed amount of credit with a payback period that may begin up to 10 years later.
How do I know which is best for my situation?
Your individual circumstances and capacity to repay the loan will determine whether you want to proceed with a bridge loan or a HELOC.
A bridge loan is typically a good option if you need money to spend on your new house.
A HELOC, on the other hand, offers longer terms for repayment if you don’t believe you’ll be able to pay back the loan in full immediately. Do your research before applying because different lenders will provide varying possibilities and conditions.
You’ll also want to estimate future costs that will be incurred. The bridge loan, for instance, can assist in providing the 20% down payment you need for your home.
Long-term mortgage payments are decreased by putting down this sum because private mortgage insurance (PMI) is no longer necessary.
However, if you have some money set up for your down payment but need to pool some extra funds, a HELOC would be a better option. Your savings and a smaller loan can help you come up with that 20% down payment.
Bridge loan vs. HELOC: Which is the financially smart option?
HELOC can be a quicker, more affordable choice out of the two, especially if you have a lot of equity in your home.
Although the lender will technically allow you to borrow against whatever asset you hold, including your 401(k), the HELOC can be the simplest or present the shortest path if you have enough equity.
The HELOC may be the better financial choice because the interest rate on a bridge loan mortgage will be greater than it would be on a regular mortgage. While a bridge loan can also be a valuable tool for short-term financing, it can be more expensive overall, and there may be additional costs that range from 2-4 %.
Make the right choice with Compass Mortgage
Whatever decision you make, whether a bridge loan or a HELOC, Compass Mortgage is available to help you make the right choice.
Our experienced and passionate team is ready to help you get pre-approved, buy a new home or tap into your existing home’s equity.
Reach out to work with us today!
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