Can I Use a HELOC as a Bridge Loan in California?
One of the more common questions we are asked here at Independent Lending is can I use a HELOC as a bridge loan? The answer is yes however let’s cover the main features and benefits offered by California bridge loans, and compare them to a HELOC.
California bridge loans allow homeowners to buy a new home before selling their current one. This strategy lets you obtain financing based on your existing property, giving you the cash needed to buy the new home. It’s a way to “bridge the gap” from a financing standpoint, hence the term.
Buying a Home Before Selling the Existing Property
California homeowners often find themselves in a situation where they are selling their current home and buying another one at the same time. There’s a lot to consider when juggling two separate real estate transactions, and financing is one of those factors.
If you have some equity built up in your current home, you’ll want to apply that to your next purchase. After all, you’ll likely encounter a down payment and closing costs when buying your new home, as you did when purchasing the current property.
You actually have several ways to go about this. In California, bridge loans, home equity loans, and home equity lines of credit (HELOC) are often used for this purpose.
While there are pros and cause associated with nearly every financing strategy, you might find that the advantages of a California bridge loan outweigh any potential downside. The HELOC option, on the other hand, often has significant downsides from a borrower’s perspective.
California Bridge Loans: Pros and Cons
Definition: A bridge loan is a short-term loan that can be used to bridge the gap between buying a new home and selling your previous one. These loans are usually provided by hard money lenders, as opposed to bigger banks and traditional lenders.
Some California homeowners prefer to buy their next home before selling the current one. In such cases, they don’t have the proceeds from a sale to put toward the new home’s down payment. This is where the bridge loan comes into the picture. The money obtained through a California bridge loan could be applied to the down payment and closing costs.
Benefits of using a bridge loan include:
These benefits do come with a downside. In California, homeowners who use bridge loans tend to encounter higher fees and interest rates, compared to the home equity line of credit. But for many of our clients, the advantages of fast and easy approval far outweigh these higher costs. Also, borrowers typically pay off their bridge loans just as soon as they sell their current homes.
Home Equity Line of Credit: Pros and Cons
Definition: A home equity line of credit, or HELOC, is a revolving line of credit that can be used for a variety of purposes. Like other equity-based financing options, it uses the home as collateral. In California, HELOCs are generally offered by larger banks that impose strict qualification criteria.
With this method, California homeowners can take out a line of credit based on the amount of equity they currently have in the home. They can then use the credit as needed, much like using a regular credit card.
Some homeowners in California use the HELOC to provide funding when selling a current home and buying another. For example, they might pull cash from the HELOC to help cover their down payment, closing costs, moving expenses, etc. Later, after selling the previous home, they could use the profits to pay off the HELOC.
But there are some disadvantages to this financing strategy:
But it’s not all negative. There are some advantages to this strategy as well. Generally speaking, a California HELOC might cost less over the long term when compared to a bridge loan. Additionally, you could qualify for a lower interest rate on a home equity line of credit.
Many of our clients find that the advantages of a California bridge loan outweigh any downside. In fact, some of them have a hard time obtaining a HELOC and end up using a bridge loan to accomplish their short-term financing goals. That’s a fairly common scenario.
Ready to Explore Your Options?
As a hard money lender in California, we offer bridge loans to borrowers all across the Golden State. If you need short-term financing to help bridge the gap between buying and selling a home, please contact us. We can help you choose the best financing strategy based on your individual needs and goals.
