Bridge loans vs. HELOCs: How to buy before you sell

What you’ll learn ✅

• What the core differences are between bridge loans and HELOCs

• How both financing options work

• Which pros and cons to consider

It's such a common scenario when moving house. You’ve moved forward on a new home purchase but haven’t sold your current house yet. This can leave you short of cash, as the proceeds usually help cover the down payment and closing costs on the new property.

Two of the most common ways to make up the shortfall are bridge loans and home equity lines of credit (HELOCs). And while they can both do the job, their distinct features make them ideal for different situations.

In this guide, you’ll learn the main differences between bridge loans versus HELOCs, including loan terms, interest rates, and repayment structures.

What’s a bridge loan?

A bridge loan is a short-term financing option usually used to cover a cash shortage if you buy a property without selling your home first. It’s sometimes called a bridging loan.

How does a bridge loan work?

Bridge loans are lump-sum financing, giving homeowners access to a set amount of funds all at once. Homeowners often use them to bridge the gap between selling and buying a home (hence the name), so these loans usually have a fast turnaround time (5–10 days) and a short term (3–12 months).

This financing option usually has high interest rates, even when applicants have great credit scores. It also uses your new or current home as collateral.

What’s a HELOC?

A HELOC is a second mortgage that lets you borrow against the equity you’ve built up in your home. Most HELOCs provide access to up to 80–90% of a property’s value.

How does a HELOC work?

HELOCs are a revolving line of credit, similar to a credit card, not a lump-sum loan. People use them for a variety of purchases, from closing costs to home improvement. They’re similar to conventional loans, lasting about 20–30 years, and they usually take 2–6 weeks to secure.

These loans also use your property as collateral. HELOCs tend to have more favorable interest rates than bridge loans. 

HELOCs vs. bridge loans: Key differences

Both financing options let homeowners access funds and handle large purchases when they need it, but neither is one-size-fits-all. Here’s are their key distinctions side by side:

Let’s take a look at these points in depth.

Loan term

Bridge loans typically have repayment deadlines of 3–12 months. HELOCs have a much longer window of 20–30 years, like a conventional loan.

Interest rate

HELOC interest rates average about 7.4% and are usually variable. Bridge loans tend to have much higher interest rates, sometimes 2–4% more than HELOCs. They can be fixed-rate or variable.

Repayment structure

With a bridge loan, homeowners pay interest on the entire loan amount in each installment. These payments are interest-only until the loan term ends. Once the current home sells, people typically repay the principal with the cash from the current home’s sale.

HELOC repayment has two phases. During the draw period, you can borrow against your equity as needed, and you only have to pay interest on the amount you borrow, not the entire credit limit. This period can last up to ten years. Once it’s over, the repayment period begins, which can last up to twenty years.

Recommended credit score

Most lenders recommend a credit score in the mid 700s for bridge loans and the high 600s for HELOCs. That said, some provider’s requirements are lower than these numbers, though borrowers will usually have to manage higher interest rates.

Use cases

Borrowers primarily use bridge loans to cover expenses like closing costs and the down payment when they’ve purchased a new home without offloading their current home. This makes them the usual pick for this situation.

You can use a HELOC for this purpose, but they have a much wider range of use cases. These include funding major home improvements, paying off college tuition, and consolidating debt.

Pros and cons of bridge loans

Choosing wisely between HELOCs versus bridge loans means carefully comparing their benefits and drawbacks. We’ll start with bridge loans.

Bridge loan pros

Here are the main perks of securing a bridge loan:

• Quick cash injection: These loans are typically faster to secure, offering a quick way for homeowners to cover expenses.

• Short term: If you only need to cover a few closing costs, it might make sense to use a loan that won’t be with you for decades.

Bridge loan cons

Here are the drawbacks of using a bridge loan:

• Higher interest rates: Bridge loans often have interest rates, and because you pay interest on the full amount with each installment, this can result in pricey payments.

• Short repayment window: The very short repayment deadline can cause issues if you can’t find a buyer for your current home. This could land you with three separate loans to pay: your initial mortgage, your new home’s mortgage, and the bridge loan.

Pros and cons of HELOCs

HELOCs have their own set of benefits and drawbacks to think about before making a decision.

HELOC pros

Here are the perks of using a HELOC:

• Lower interest rates: HELOC rates run lower, making it easier to manage payments during a time with many expenses.

• Longer terms: Because the repayment period lasts decades instead of months, you can take a more relaxed approach to selling your current home.

• Flexible use cases: HELOCs have no restrictions on how you can use the funds, letting you spend the cash wherever you need it.

HELOC cons

Here are some potential disadvantages of securing a HELOC:

• Variable interest rates: The overall interest you’re on the hook for can increase if market rates go up. Variable rates also make it more difficult to calculate your budget.

• Overspending risk: When you have a revolving line of credit, it can be tempting to borrow more than you can afford.

What’s the right financing option for you?

Is a bridge loan a good idea for your situation, or is a HELOC a better fit? Many borrowers prefer HELOCs for their flexibility, better interest rates, and less claustrophobic repayment deadlines. However, a fast turnaround is tempting for many people juggling buying and selling, making quick loans more appealing — like bridge loans, for example.

If you need a fast process, you can opt for a HELOC without compromising speed when you work with Better. Go from application to approval fast with Better’s One Day HELOC, where, if you qualify, will give you a decision in 24 hours and the cash in your account in as little as seven days.

...in as little as 3 minutes – no credit impact

Three alternatives to bridge loans and HELOCs

If neither a HELOC or bridge loan feels quite right, you have plenty of others to choose from. Here are a few financing options to consider:

• Home equity loans: Similar to HELOCs, home equity loans provide a lump sum instead of a line of credit. They usually have longer terms, about 5–15 years, like bridge loans.

• Cash-out refinances: These loans let you replace your original mortgage with a bigger one. With a cash-out refinance, you pay off the first mortgage with the funds and pocket the remainder.

• Personal loans: These loans can provide the funds you need but are usually harder to secure. Unless you have an incredibly strong credit profile to qualify for good terms, personal loans typically have higher interest rates than both bridge loans and HELOCs.

Score a competitive rate, and secure Better financing

Bridge loans and HELOCs can both do the trick if you’ve made a new home purchase but your current home is still on the market. Which one to pick depends on your timeline, equity, and risk tolerance. If you want the comfort and flexibility of a HELOC with the approval speed of a bridge loan, reach out to Better.

With Better, you can get pre-approved for a HELOC in as little as three minutes. Secure competitive interest rates, and move forward on your new home purchase stress-free. Better’s 100% online process is 12 days faster than the industry average, so you can streamline the usual steps and close on time.

Settle into your new home with peace of mind by borrowing with Better.

...in as little as 3 minutes – no credit impact

FAQ

What’s the difference between a home equity loan and a bridge loan?

A home equity loan provides access to a lump sum amount for a long term, usually about 5–15 years. They have lower interest rates and fixed monthly payments of both interest and principal. Bridge loans offer a lump sum for a short term, about 3–12 months. They have higher interest and a more complex repayment structure.

What’s a HELOC, and how can it be used to buy a house before selling?

HELOCs let you tap into your equity to open a revolving line of credit. They're most often used for major expenses like home renovations and paying off college tuition, but you can also use them to cover expenses if you buy before you sell. This works by drawing the amount you need, then using the sale proceeds to pay off the balance once you’re sold your current home.

What’s a bridge loan, and how does it work when buying a home?

Bridge loans provide you with a lump sum to manage the down payment and closing costs on a new property. This is most common when your current home is still on the market, and you can’t use the sale proceeds to fund your new home purchase.

¹ Disclaimer: Better Mortgage’s One Day HELOC promotion offers qualified customers who provide certain required financial information/documentation to Better Mortgage within 4 hours of locking a rate on a HELOC loan the opportunity to receive an underwriting determination from Better Mortgage within 24 hours of their rate lock. The underwriting determination is subject to customary terms, including fraud and anti-money laundering checks, that take place pre-closing and which may trigger additional required documentation from the customer. Better Mortgage does not guarantee that initial underwriting approval will result in final underwriting approval. See One Day Heloc Terms and Conditions.