Bridge loan vs. HELOC: how do they compare?
Bridge loans and home equity line of credit (HELOC) are two types of loans based on home equity, rather than exclusively on the borrower's credit score. While there are similarities between these types of loans, there are distinct differences in their purpose.
A HELOC is typically used by homeowners who want money for home improvement projects or to make large purchases for things like a wedding, college tuition, or to pay off high interest debt. A bridge loan is designed specifically as a short-term loan to provide transitional funding when a homeowner is selling their home and needs money for a down payment on a new home. Because bridge loans are short term loans the interest rate is often higher than HELOC interest rates and may be more difficult to qualify for.
What is home equity?
Home equity is the dollar portion of the home that you own based on how much you owe on your mortgage and any other secured loans that use the house as collateral.
For example, if you do not have a mortgage on your home then you have 100% equity in the home. People who have a mortgage own only a percentage of the home (the lender who holds the mortgage also owns a percentage of the home).
If you have a mortgage, as you make payments toward the principal amount owed (not interest) your equity increases until the mortgage is paid in full, and you have 100% equity.
To calculate equity, take the amount your property is currently worth, or the appraised value, and subtract the amount of any existing mortgage on your property.
For example: A home's appraised value is $600,000 – Amount owed on mortgage is $250,000 = $350,000 Equity.
Read on to learn more about a bridge loan vs. HELOC.
At Credit Union of Southern California (CU SoCal), we make getting a Home Equity Line of Credit (HELOC) easy.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.
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What is a HELOC?
A
Home Equity Line of Credit (HELOC) is a type of “revolving” credit, similar to a credit card. HELOCs come with a credit limit based on the amount the borrower is approved for. During the "draw period,” a variable interest rate is charged on the amount of the loan that's used. The draw period is followed by a repayment period when the loan converts to a fixed interest rate.
There are
HELOC pros and cons to consider. One of the advantages of a HELOC is that you can take out money as you need it, and you will only pay interest on the amount you use. However, because a HELOC is a type of
second mortgage and is secured by your home, if you do not repay the loan, the bank can foreclose.
What is a bridge loan?
A bridge loan is designed to be used by a home buyer to bridge the financing gap between the sale of their existing home when money is needed for the purchase of a new home. According to the Consumer Financial Protection Bureau, a bridge loan is when a lender extends credit in the form of a bridge or swing loan to finance a borrower's down payment on a home purchase. The borrower pays off the bridge or swing loan with funds from the sale of his or her existing home and obtains permanent financing for his or her new home from the bridge loan lender or from another lender.
How do bridge loans and HELOCs compare?
Here are some key differentiators to help you choose between a bridge loan vs. HELOC.
Interest rates
HELOC: Variable interest rate during the draw period and interest-only is charged on funds used, not the whole credit line.
Bridge loan: Interest is charged on the full loan amount from the start of the loan term. Rates may be higher than HELOC rates.
Lump sum vs. revolving credit
HELOC: Funds are given as a credit line that is replenished as payments to the principal amount are made.
Bridge loan: Funds are provided in a lump-sum.
Spending flexibility
HELOC: Can use the money any way you want.
Bridge loan: Typically, must be used to finance the purchase of a new home while your current home is for sale. Depending on the lender's unique loan terms, bridge loan funds may be used to pay for necessary renovations and repairs on the new home.
Terms
HELOC: Long-term loan that typically has a 10-year draw period.
Bridge loan: Short-term loan that may be in place for up to one year.
Collateral
HELOC: Uses the home as collateral.
Bridge loan: Uses the home as collateral.
Equity requirements
HELOC: Generally, 20% equity required to qualify.
Bridge loan: Generally, 20% equity is required to qualify.
Credit requirements
HELOC: Some lenders will accept a credit score as low as 620, however you may be charged a higher interest rate than if you have a credit score in the 700s.
Bridge loan: A minimum 700 credit score is typically required. Lenders will also look at the borrower's
debt-to-income ratio.
Repayments
HELOC:
HELOC repayments have two stages. All HELOCs have a “draw period” (typically 10-15 years) and a “repayment period” (typically up to 20 years). During the draw period, you can borrow as much of the funds you need, and repayments are made based on interest only. After the draw period ends, the HELOC repayment period begins. At this time, most HELOC interest rates will adjust to a fixed rate, and monthly payments will include both principal and interest on the outstanding balance.
Bridge loan: While the loan is in place, interest only is charged on the full loan amount. Any remaining balance must be paid-off when the home on which the loan is secured is sold. Terms may vary depending on the lender and the loan program you choose.
Debt-to-income (DTI) ratio
HELOC: A debt-to-income (DTI) ratio is a comparison between your income and your monthly debt payments. Lenders look at a borrower's
debt-to-income ratio (DTI) as a measure of the ability to repay the loan. A 43% debt-to-income ratio is typically required.
Bridge loan: Most lenders require that the borrower's
DTI not exceed 50%.
Are bridge loans more expensive than HELOCs?
Due to the short-term nature of bridge loans, they do come with higher interest rates which means you'll pay more for the money you borrow.
Can a HELOC be used as a bridge loan?
Yes, the funds from a HELOC be used as a bridge loan. If your line of credit is large enough to cover the needed down payment on a new home and you are still within the draw period of your HELOC, then you can simply withdraw the amount you need.
Do I need to repay my HELOC or bridge loan before selling my house?
Both HELOCs and bridge loans need to be paid in full and closed when you sell your primary home on which the loan is secured.
What are some alternatives to HELOCs and bridge loans?
If you do not qualify for a HELOC or bridge loan, or would like to consider other loan options, here are some common alternatives:
Home equity loan. Like a HELOC, a home equity loan is a type of loan based on the equity in your home. These loans have a fixed interest rate for the duration of the loan term. Interest is charged on the entire loan amount, whether you use the money or not.
Personal loan. Credit unions and banks offer a wide variety of
secured and unsecured personal loans to meet a wide variety of borrowing needs. You’ll find variable and fixed rate
personal loan options.
Cash-out refinance. Getting cash out during the refinance of your mortgage means borrowing more than what you owe on your current mortgage and getting a cash disbursement of the extra funds at closing. You can use the cash any way you choose. Refinancing your current mortgage to a new mortgage could help you lower your monthly payments, if you can get a lower interest rate than you currently have.
Are HELOCs or bridge loans worth it?
Choosing between a HELOC or bridge loan should be based on your primary financial need. Both types of loans are granted based on home equity and can put your home at risk of foreclosure if the loan is not repaid.
If you are not selling your home and simply need extra cash for renovations or other big purchases, getting a HELOC could be a good choice.
If you're selling your home and need money for a down payment on a new home, either a HELOC or a bridge loan could work well.
Why Savvy Consumers Choose CU SoCal
For over 60 years, CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Get Started on Your Home Equity Line of Credit Today!