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Bridge Loan vs. HELOC: Which Is Better

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If you need cash, bridge loans and HELOCs can both provide you with the financing you need to achieve your real estate goals. But which one is better for you? Stay tuned to find out what you need to know so that you can make the best possible financial decision. 

What Is a Bridge Loan?

A bridge loan is a type of temporary financing that acts as a “bridge” to cover the gap until you can secure permanent financing. Most bridge loans have terms that range from six to 18 months, however, some bridge lenders will allow you to extend the term if needed. Bridge loans can be used to purchase both residential and commercial real estate for primary residences and investments. 

Pros and Cons of Bridge Loans

Here are the pros and cons of bridge loans that you should know about: 

Pros

  • Bridge loans are more flexible than other types of loans in terms of qualifications. Bridge lenders are more willing to work with those with below-average credit scores. Bridge lenders are also more willing to work with foreign investors who may not have domestic tax or income documents.
  • Bridge loans can be processed and closed upon quickly. This allows you to make more competitive offers in a fast-paced market where sellers are looking to close as soon as possible. In fact, lenders like Vaster are able to get you your funds in a matter of days rather than weeks. 
  • Bridge loans are more flexible than other types of loans in terms of repayment options. You may not be required to make payments for the first few months or you may be required to only pay the interest on the loan. 

Cons

  • Bridge loans may come with higher interest rates since they require a substantial amount of work for the lender for a relatively short time period. While rates vary, you can generally expect to pay around 6 to 10% in interest for a bridge loan. 
  • Bridge loans have short terms that can be stressful if you’re unable to sell your current home or secure more permanent financing. While 18 months may seem like a decent amount of time, there’s never a guarantee that your plans will work out in a timely manner. 
  • Bridge loans come with closing costs and fees that can increase the overall cost of the loan. While closing costs vary, you can generally expect to pay around 2 to 5% of the value of the loan in closing costs. 

What Is a HELOC?

A home equity line of credit, or a HELOC, allows you to take money from the equity you’ve built up in your home. HELOCs are similar to credit cards since you can borrow what you need to rather than taking out a large lump sum. Although you won’t be able to borrow all of your equity, you will be able to access more funds when you repay your outstanding balance. 

Pros and Cons of HELOCs

Here are the pros and cons of HELOCs that you should know about: 

Pros

  • HELOCs often come with lower interest rates since you’re borrowing against your own equity. Interest rates are now at historic lows and it may be possible for you to find a HELOC with an interest rate below 5%. 
  • HELOCs offer a great amount of flexibility in terms of what you use the funds on. For instance, you can choose to use the funds for home improvement projects, invest in your education, or start a business. It’s totally up to you!
  • HELOCs also come with tax-deductible interest so long as you use the funds on home improvement projects. As a result, you may be able to save some money on your taxes — which is always a good thing. 

Cons

  • HELOCs force you to put your home up as collateral. Since your home is likely your most valuable asset, risking foreclosure in the event that you’re unable to repay the line of credit may not be a risk you’re willing to take. 
  • HELOCs come with variable interest rates that can both increase and decrease depending on the Federal Reserve. So even though interest rates are low now, they may increase in the future and you could end up paying more than you expected. 
  • HELOCs require a lot of borrower discipline since they’re essentially just like a credit card. While you can borrow at your discretion, you also have to pay them back in a timely manner to avoid racking up a ton of interest. 

Which Option Is Better for You?

It’s hard to say whether a bridge loan or a HELOC is better for you since it really depends on your financial situation and goals. Here are some guidelines to help you decide the right option for you: 

  • If you already own a home and have built up a substantial amount of equity, using a HELOC makes sense thanks to low interest rates. 
  • If you don’t own a home or don’t have enough equity built up and need access to quick cash for a new real estate purchase, then using a bridge loan makes sense. 
  • If you’re looking for funds to use for something other than real estate, then you should use a HELOC thanks to the flexibility offered by this financing option. 
  • If you’re lacking in terms of credit history or financial history, bridge loans are more accessible for new borrowers. 

How to Secure a Bridge Loan?

If you’ve decided that a bridge loan is the right option for you, here’s what you need to do to secure one: 

  1. Find a lender. Bridge loans are unique loan products that aren’t offered by every lender. Instead, you may need to use a specialized lender that focuses on bridge loans, like Vaster. Make sure that your lender is trustworthy and upfront about their fees and policies before you move forward. 
  2. Apply for the loan. Gather your documentation and prepare to apply for the loan. While bridge lenders typically have less stringent qualification and application processes, you should be prepared for them to run your credit history. You should also be prepared to provide them documentation regarding your income and assets. 
  3. Get approved and close on the loan. The lender will then consider your application and either approve or deny you based on the information you provided. From there, the closing process is relatively simple. The best bridge lenders like Vaster will be able to get you your funds in no time so that you can quickly move forward with your real estate purchase. 

How to Secure a HELOC?

If you’ve decided that a HELOC is the right option for you, here’s what you need to do to secure one: 

  1. Check out different options. Many banks and institutions offer HELOCs so you definitely need to look around to make sure that you’re getting the best rates and terms. Also, make sure to look into any fees that may be associated with the line of credit. 
  2. Apply for the line of credit. You will need documentation showing the value of your home, household income, and any debts. You will also need to provide a mortgage statement, property tax bill, and a copy of your homeowner’s insurance policy. 
  3. Get approved and access your funds. The institution will then consider your application and either approve or deny you based on the information you provided. From there, you can access your funds — as much as you’d like whenever you’d like. 

Alternatives to Bridge Loans and HELOCs

While bridge loans and HELOCs are great financing options, there are other alternatives you should know about that may be better suited for your financial situation, including home equity loans, cash-out refinances, and hard money loans. 

  • Home equity loans are similar to HELOCs in that they tap into your home’s equity, however, they provide you with a lump sum of which the entire value will accrue interest. As a result, home equity loans come with fixed interest rates and a set repayment period. 
  • Cash-out refinances provide you with a new home loan with a balance that’s higher than what you currently owe on the home. You can then use the extra funds to finance improvements, purchase a new property, go back to school, etc.
  • Hard money loans are similar to bridge loans in that they are a quick and easy way to access financing to purchase real estate. However, they often come with sky-high interest rates. 

The Rundown on Bridge Loans and HELOCs

With a great lender like Vaster, a bridge loan can help you quickly purchase a new property. On the other hand, funds from a HELOC can be used for other purposes. No matter what type of financing you’re looking for, reach out to the lending experts at Vaster for more information. 

 

Sources:

Is a Bridge Loan Right for You? | Forbes

What Is a HELOC and How Does It Work? | Credit Karma

Home Equity Loan vs. HELOC: What's the Difference? | Investopedia

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