Do you need quick access to funds by tapping into your home’s equity? Are you trying to purchase a new home before you can sell your current property?
In these scenarios, homeowners often turn to a bridge loan or HELOC (home equity line of credit) to secure the cash they need to achieve their goals.
What's in this article?
How do you know which option is right for your unique situation as a borrower?
In this guide, we’ll define bridge loans versus HELOCs and explain their differences, considerations and pros and cons.
What is a bridge loan?
A bridge loan is designed to “bridge the gap” between an immediate need for funds and the ability to secure a permanent source of financing.
For example, one of the most common bridge loan scenarios is using the funds to purchase a new home while the homeowners wait for their current property to sell.
The homeowners can use the funds from the eventual home sale to repay the bridge loan, but they currently do not have the cash to move forward without the loan.
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What is a HELOC?
A HELOC is a flexible source of funding that can be used for a range of borrower needs, including:
- Home improvements or upgrades
- Down payment on a new home
- Debt consolidation
- Education expenses
- Emergency fund
- Real estate investments
HELOCs are structured as revolving lines of credit, meaning the borrower can take out what they need, repay the funds and reuse the funds as needed during the designated draw period.
Funding is based mainly on the amount of equity you have in your home.
Differences between bridge loans and HELOCs
While bridge loans and HELOCs both provide borrowers with quick access to cash, they each serve specific needs and purposes.
Let’s look at the main differences between bridge loans and HELOCs, including the loan structure, terms, uses and more.
Funding structure
- Bridge loan: One-time, lump-sum loan that gives borrowers a set amount of cash
- HELOC: Borrower is approved for a credit limit and can draw funds as needed
Loan term
- Bridge loan: Short-term loan (6-12 months) that is typically repaid once the current home sells
- HELOC: The draw period typically lasts 5-10 years, followed by a repayment period
Repayment
- Bridge loan: Interest-only payments during the term and a “balloon,” a lump sum payment for the full balance at the end of the term
- HELOC: Interest-only payments during the draw period and gradual repayments over up to 20 years
Collateral
- Bridge loan: Secured by the borrower’s current home and sometimes also by the new home, depending on how the loan is structured
- HELOC: Secured by the current home, and typically structured as a second lien behind the primary mortgage
Qualification process
- Bridge loan: May require that the borrower is under contract for their existing home and that the borrower can qualify for two mortgages at once
- HELOC: Focuses on the borrower’s credit score, income and available equity
Uses and flexibility
- Bridge loan: Meant for a specific transaction and is closed once the balance is paid in full
- HELOC: Ongoing access to funds during the draw period—draw, repay and redraw as needed
When to consider a bridge loan
Bridge loans can help you act quickly and eliminate the need to condition your offer on selling your old home first.
Let’s look at three key bridge loan scenarios.
You’ve found a new home but haven’t sold your current one yet
Bridge loans are specifically designed for homeowners who are between properties.
If you’re ready to move forward with a home purchase but your current property hasn’t sold—or hasn’t even hit the market yet—a bridge loan provides the financing to move ahead without delay.
You’re in a competitive market and need to buy before selling
In hot real estate markets, sellers may not accept offers contingent on selling your current property.
A bridge loan gives you the financial leverage to make a firm, non-contingent offer, increasing your chances of securing the home you want before someone else does.
You need fast access to a lump sum of cash to make a down payment
Bridge loans are ideal for covering your new home’s down payment and closing costs.
Sometimes, a bridge loan may help you reach the 20% down payment threshold needed to avoid private mortgage insurance (PMI).
Eliminating PMI lowers your monthly payments and increases your long-term savings.
When to consider a HELOC
HELOCs offer flexible access to your home’s equity.
Consider a HELOC if any of the following circumstances apply to you.
You have significant home equity and need flexible funding
HELOCs allow you to access large amounts of home equity without selling your property or refinancing.
You can use the funds however you choose and at your own pace, including a down payment, renovations or debt consolidation.
You’re not in a rush to sell your current home
HELOCs are a good fit for homeowners who don’t intend to sell their homes immediately.
They are a longer-term solution for borrowers who want to access their equity now and repay it on their schedule or with a future home sale.
You prefer to borrow only what you need, when you need it
Unlike traditional loan structures that provide the full loan amount up front, HELOCs operate essentially like a credit card.
You can draw only what you need, and repay and reuse the funds throughout the draw period.
This makes HELOCs a cost-effective, low-commitment option for borrowers who value flexibility.
How local market conditions affect your choice
When deciding between a bridge loan and a HELOC, examining your local real estate market closely is crucial.
Key factors like housing inventory, home appreciation rates and average days on market (DOM) can all influence which option makes more financial sense.
- Bridge loan example: In a fast-moving market with low inventory, a bridge loan might give you the competitive edge to purchase a new home before your current one sells.
- HELOC example: If your area has high home equity values and stable appreciation, a HELOC could offer greater flexibility with lower up-front costs.
Understanding how quickly homes are selling, how much equity you’ve built and whether property values are rising or plateauing can help you make a financing decision tailored to your region.
Compass Mortgage’s experienced loan officers can help you evaluate these local trends to determine which option best fits your needs.
Pros and cons of bridge loans and HELOCs
Which option is better for you? Let’s compare each type of loan with a quick list of pros and cons.
HELOC pros
- Interest-only payments during the draw period
- Ability to repay and reuse funds
- Longer terms
- No need to sell your home right away
Heloc cons
- Variable interest rates
- Risk of over-borrowing
- Puts your home at risk if you default
Bridge loan pros
- Quick access to a lump sum of cash
- Allows you to make non-contingent offers
- Short-term financing solution
- Can eliminate PMI
Bridge loan cons
- Short repayment window, with a balloon payment due at the end of the term
- Higher interest rates than HELOCs
- Potential to carry two mortgage payments if the home doesn’t sell quickly
- Higher closing costs and fees
Bridge loan/HELOC FAQs
Qualifying for both is possible, depending on your financial profile, credit score, debt-to-income ratio and available home equity. However, most homeowners choose one based on their immediate needs, risk tolerance and market conditions.
Approval timelines vary, but bridge loans typically close faster. HELOCs may take a few weeks to a month, depending on the lender’s process and whether a home appraisal is required.
Start by evaluating your financial goals, available home equity, timing needs and local housing market. A bridge loan may be ideal if you need quick access to funds to secure a new home purchase. If you’re seeking flexible access to equity with lower upfront costs, a HELOC could be a better fit.
Bridge loan vs HELOC: Which option is right for you?
Choosing between a bridge loan and HELOC depends on your timing, financial goals, and how you plan to transition between homes.
Whether you’re looking for flexibility or speed, Compass Mortgage can help you navigate the right solution.
Access your personalized loan options with Compass Mortgage.