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Bridge Loan vs. HELOC: Which Do You Need?

Byline profile imageWritten by Rosemary Carlson
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Byline profile imageEdited by Becca Stanek
Byline profile imageEdited by Arturo Conde, CEPF®
Updated on
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Bridge loans and home equity lines of credit (HELOCs) are short-term financing tools common in real estate. Bridge loans offer temporary funding to cover the gap between buying a new property and selling an existing one. Meanwhile, HELOCs allow borrowers to tap into their home’s equity as a revolving line of credit. Both options help with property purchases and sales, but they work in different ways. Comparing their terms, costs and repayment structures can help you decide which option best fits your financial situation.

Consider working with a financial advisor when you seek short-term financing for a real estate property.

How a Bridge Loan Works

Bridge loans apply when you want to simultaneously sell your home and buy another. If you’re selling your current home and find another home to buy, a bridge loan serves as interim financing for your new home. It is short-term financing until the sale of your current home or until you receive your new mortgage.

If you have a mortgage on your current home and are waiting to sell, a bridge loan can help with a down payment. You then repay the bridge loan with the proceeds from the sale of your current home.

Bridge loans typically have a maximum one-year term with a higher interest rate than other financial instruments. Rates may be 2% to 4% higher than a 30-year fixed-rate mortgage. Another percentage point or two may be added onto that rate to cover fees and administrative expenses. A bridge loan also usually requires collateral. 

Both the higher interest rates and the collateral requirement stem from the riskier nature of bridge loans. Often, the homeowner must make a mortgage payment on their current home, plus a second payment on the bridge loan. 

Sometimes, you can negotiate with the lender for payment at the end of the bridge loan term rather than monthly. In this setup, the bridge loan and all accumulated interest are due upon the sale of your current home.

Most lenders offer bridge loans equal to 80% of the combined value of the two loans. You must have enough equity in your home to qualify.

Lenders also look for low debt-to-income ratios when qualifying applicants for a bridge loan.

What Is a Home Equity Line of Credit (HELOC)?

A HELOC is a revolving line of credit that lets you borrow against your home’s equity.

A HELOC allows you to tap into your home’s equity.

Whereas a home equity loan is a lump sum, a HELOC is a line of credit from the lending institution. You can borrow up to your approved credit limit, pay off your balance and then borrow it again. The collateral for your HELOC is your home, though, so non-payment would put it at risk.

HELOCs tend to have very competitive interest rates and typically no closing costs. They are usually adjustable-rate loans, meaning the interest rate fluctuates with market conditions. 

You can use a HELOC in the same way as a bridge loan when purchasing a new home. Just like with a bridge loan, you can use the HELOC proceeds to make the down payment on a new home, along with the payments on your current home, while awaiting the sale of your current home.

HELOCs are usually only granted to creditworthy borrowers. Lenders typically require you to have at least 15% to 20% equity in your current home to qualify.

Differences Between a Bridge Loan and a HELOC

HELOCs and bridge loans are two financial tools that can accomplish similar goals when used correctly. However, they each come with distinct pros and cons.

For starters, HELOCs are cheaper than bridge loans. A bridge loan is a high-risk source of short-term financing because of the extra payment in addition to your current mortgage payment. Because of this risk, bridge loans generally have higher interest rates, plus other fees.

A HELOC may also allow you to deduct some interest if you itemize your deductions. This is not true for a bridge loan, which gives HELOCs an edge.

Another distinction is that you don’t have to repay the amount you take from a HELOC during the draw period. This is when you can access your credit whenever you need it, up to the limit. The repayment period may not begin for as long as 10 years.

A bridge loan, however, is disbursed as one lump sum. This can be very convenient if you need a large influx of cash. However, you must then make payments on it immediately.

Examples of When to Use a Bridge vs. a HELOC

When to Use a Bridge Loan

A bridge loan is most useful for getting fast cash to buy a new home before your old one sells.

Imagine you’ve found your next house in a hot market where sellers won’t wait. A bridge loan immediately gives you the lump sum for a down payment, even if your current home hasn’t closed. Once your old home sells, you can then use the proceeds to pay off the bridge loan.

This will likely mean a higher interest rate and fees. However, the speed can make the difference in securing the property.

When to Use a HELOC

A HELOC may be a better fit when you have significant equity and you don’t need the cash all at once.

Suppose you’ve built up 40% equity in your current home and want to pull out funds for a down payment. A HELOC lets you borrow and pay interest on only what you need. You then have the option to keep drawing as necessary during the draw period.

It’s cheaper than a bridge loan and offers flexibility. However, the drawback of a HELOC is the requirement for good credit and enough home equity to qualify.

In slower housing markets, a HELOC can give you time and flexibility without forcing a quick sale. In fast markets, however, a bridge loan may be the tool that lets you move forward immediately.

The right choice depends on your timing, equity and tolerance for higher borrowing costs.

What to Do If You Don’t Qualify for Either Option

Not every homeowner will meet the credit, equity or income requirements for a bridge loan or HELOC. Several alternative approaches can help you manage the timing gap between buying and selling.

Contingency Offers

Adding a home sale contingency to your purchase offer means the deal only moves forward once your existing property has sold. This removes the need for any interim financing, since the two transactions are effectively linked.

The tradeoff is negotiating power. Sellers in active markets often prefer buyers who can close without conditions. Therefore, a contingency may put you at a disadvantage when competing with other offers.

Sale-Leaseback Arrangements

In a sale-leaseback, you sell your current home but the buyer may remain as a tenant for a set period following closing.

You walk away with sale proceeds in hand, which can then fund the down payment on your next purchase. Meanwhile, you skip the pressure of an immediate move.

Both parties must agree on rent and terms upfront. Not every buyer will be open to the arrangement, but it can be a practical solution when it works.

Piggyback Loans

Rather than using your existing home’s equity, a piggyback loan uses a second mortgage to help cover the new property’s down payment. This sidesteps the need to sell first while avoiding private mortgage insurance (PMI).

Because this adds a second monthly payment, it suits borrowers with the income to carry both obligations until the original home sells.

Negotiating a Delayed Closing

Sometimes the simplest fix is asking the seller of the new property for more time. A later closing date may give your current home enough runway to sell without requiring any additional financing.

It costs nothing to ask. In markets where sellers are motivated, many are willing to accommodate a buyer who is otherwise ready to commit.

Bottom Line

A bridge loan covers a purchase before a sale, while a HELOC lets you borrow against home equity.

Whether you choose a HELOC or a bridge loan for short-term financing depends on your situation and qualifications for each. Evaluate the terms of each financing option to determine which is the better deal for you. Working with a financial advisor or loan professional can help you weigh the pros and cons.

Tips on Home Buying

  • Consider working with a financial advisor as you decide how to handle real estate debt. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. You can then have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you’re looking to get educated about the state of mortgage rate environment, consider using SmartAsset’s mortgage rates table.
  • SmartAsset’s mortgage calculator will help you determine how much house you can afford based on your individual circumstances.

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