When you’re trying to buy real estate or renovate property you already own, you may feel overwhelmed by your financing options. Should you get a bridge loan from Los Angeles hard money lenders or should you get a home equity line of credit? While both are good short-term financing options, each has its own pros and cons.
How Easy It Is To Qualify
When you apply for a HELOC, lenders have to verify several pieces of information:
- Your credit score and history
- Your income
- Your debt-to-income ratio
- Your savings
To qualify, you typically need to have good credit and a reasonable debt-to-income ratio.
Bridge loans, on the other hand, are usually based on collateral value. Even if your credit is less than ideal, you may still qualify for financing if the property value covers the borrowed amount, insurance, and fees.
When Funds Become Available
Due to the thorough review required, it can be a while before you hear back about your HELOC application. When you’re trying to close on a property, this can cause issues, so it’s essential to apply early for a HELOC if you intend to use it for purchasing.
In contrast, bridge and hard money loans are designed to process quickly. In some cases, lenders can provide cash in as little as 24 hours.
How You Access the Funds
As the name implies, a HELOC is a line of credit on which you can draw as you see fit. That means you don’t have to take the entire amount at the beginning — you can access funds incrementally. Additionally, the principal that you repay becomes available to you again for the life of the loan. In this way, it works much like a credit card, but with a much higher limit and property used as collateral.
When you get a bridge loan in California, on the other hand, you receive a lump sum. Like most another financing, you don’t get access to the principal you repay.
How Long Does the Term Lasts
HELOCs typically have shorter terms than mortgages, but can still be active for 10 years or more. Some institutions charge an annual fee to keep the account open.
Bridge loans, in contrast, are designed for short-term lending. Most last a maximum of two years, though people often pay them off sooner, especially if they’re using the funds to bridge a gap between buying a new property and selling old one.
How Interest Accrues
One of the best things about HELOCs is how interest accrues. First of all, interest only starts accruing after you make the first draw. Second, it’s only calculated based on the total principal used. This means the interest may be in flux throughout the life of the loan as you make draws and payments.
Bridge loans, unfortunately, are much like vehicle loans and mortgages; you’re charged interest on the principal from the get-go. The rates for bridge loans are also typically higher than those of HELOCs.
If you need cash right away, you should look for hard money lenders in California. With the right financing, you can snatch up the perfect property.
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