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Bridge Loan vs. HELOC—Which is Right for You and Your Investment

When real estate investors find a property to buy as a fix and flip project or single-family rental, they need capital quickly. So, it’s essential for investors to have a plan for funding because the right opportunity to buy could come at any time.

If an investor does not have significant cash on hand for purchases, they will need financing. Two of the fastest ways to access that capital are through bridge loans and HELOC loans. HELOC, which stands for home equity line of credit, can also be called a home equity loan.

This piece breaks down the benefits of a bridge loan vs. a home equity loan to help real estate investors deploy the right strategy at the right time.

What Is a Bridge Loan?

A bridge loan is a short-term loan. While this can take many forms across industries, in real estate investment, a bridge loan is typically an asset-based loan that allows the purchase or refinancing of a property that does not need rehab and that may or may not have a tenant.

At Lima One, bridge loans have a standard 13-month term and are interest-only loans, which means investors do not pay down principal during the course of the loan. Let’s look at some more pros of bridge loans vs. home equity lines of credit.

Benefits of Bridge Loans

• Bridge loans have a short term, and if they are interest only (as they are at Lima One), the monthly payment is reasonable.
• Because the properties do not need rehab or tenants, underwriting is faster, and loans generally close sooner.
• At Lima One, bridge loans open the door to refinances into long-term financing with no seasoning and origination fee discounts.
• Bridge loans are based on the value of the asset and do not require a borrower to meet a certain debt-to-income ratio, as they would with HELOC.
• Most importantly, bridge loans do not attach a lien to a homeowner’s primary residence.

What Is a HELOC Loan?

A home equity line of credit allows an investor to use the equity in their primary residence for any purpose, including purchasing an investment property. Generally, a bank extending a HELOC gives a borrower access to a certain amount of funds and the ability to tap into those funds very quickly.

The reason these funds are available so quickly is that the loan is already underwritten against the value of a borrower’s primary residence. The amount of funds available can fluctuate as the borrower takes out funds and pays them back.

While a HELOC provides maximum flexibility, a borrower risks having their primary residence foreclosed if they do not pay it back. This is the most significant difference between a HELOC and an asset-based bridge loan.

Bridge Loan vs HELOC Key Differences and Use Cases

With this info on bridge loans and HELOCs established, let’s focus on the pros and cons of each type of financing, specifically from the real estate investment perspective.

• A HELOC can provide quick access to funds for immediate purchases. A bridge loan can move quickly but comparatively not as quickly.
• Unless an investor has massive amounts of equity in their primary residence, a bridge loan will offer more liquidity because it is based on the value of the investment property. An 80% loan to value bridge loan can offer investors more money than a HELOC on investment properties with higher price tags, such as this Florida home that Lima One financed for $1.36 million.
• HELOC funds can be used to purchase properties that fall below a lender’s minimum property value for bridge loans. For example, distressed properties in smaller markets may not qualify for bridge loans but could be good flips funded through a HELOC.
• Most importantly, a bridge loan is not linked to an investor’s primary residence, while a HELOC is.

Smart Bridge Financing for Serious Investors

Lima One Capital offers bridge loans designed for investors to move quickly on purchases. Our bridge loans can also be used to refinance completed flips or ground-up construction builds that are up for sale. Contact us today to learn more about how you can use bridge loans as part of your investment strategy.