A bridge loan, or swing loan, can help you when you’re transitioning from one life event to another. These loans can be helpful if you’re exiting the workforce and going into retirement, or if you’re selling your house and buying another. Just watch out for high rates and a multitude of extra fees — and know you have other options.
What are bridge loans?
Bridge loans are a type of short-term, temporary financing designed to cover — or bridge — brief gaps in funding. Most bridge loans are less than 12 months long, and they can be either a lump sum or line of credit. Generally, bridge loans are secured by a home.
Most people use bridge loans to buy another home while their current home is on the market awaiting sale. Bridge loans could also be used to cover the next home’s closing costs or used to make a down payment.
These loans are also popular with seniors, often used to bridge the gap between working and retirement. Benefits, such as veteran benefits, can take as long as 18 months to start coming in. Other benefits, such as Social Security Disability Insurance, require a five-month waiting period. A bridge loan can help you make ends meet while you wait for benefits to roll in — just be sure you can repay the loan comfortably if the benefits are your main source of income.
Your rates, terms and repayment methods vary widely, largely depending on the lender and type of bridge financing you choose. But in general, bridge loans are considered an expensive form of financing — rates can get high and there can be many fees.
Options for bridge loans
Typically, bridge loans are used for real estate purposes, and are often considered a nontraditional form of short-term financing. Most bridge loans only last around six months to a year, and the terms, repayment methods and rates vary by lender.
Depending on the lender, you may not be required to make payments until your current home sells, or you’re required to make interest-only payments until the home sells. We’ll walk you through five common ways to use bridge loans.
“Refinance” your current home while you’re buying another home
The bridge loan can be used to pay off your current mortgage, and once the home sells, you pay off the bridge loan. This can be useful for borrowers who bought a new house and their current home hasn’t sold yet.
Down payment on the next home
You could take out a bridge loan to make a down payment on your next home. This can be useful for homeowners who are relying on their current home’s sale to cover the down payment. Once your current home sells, you can use that money to pay off the bridge loan.
Lump sum loan secured by your current home
This option is where the bridge loan is secured by your current home, with the loan amount being a percentage of your home’s current value — usually up to 80%. It’s similar to a home equity loan, however, expect high interest rates and a much shorter loan term.
Line of credit
Similar to a home equity line of credit (HELOC), you take out a line of credit where the amount is based on a percentage of your current home’s value, usually around 70% to 80%. For lines of credit, plan for interest-only payments during a draw period then monthly payments during the repayment period.
Unsecured lump sums
Though more rare, there are some bridge loans that aren’t secured by your current home, often made specifically for moving — popular with seniors transitioning into retirement.
Bridge loans for seniors
ElderLife is one of the few lenders that offers unsecured bridge loans specifically designed to help seniors move into retirement communities. It offers amounts from $5,000 and $500,000 with terms up to 12 months. There are no application fees or prepayment penalties, but expect to pay a high origination fee of around 8%.
How much do bridge loans cost?
The cost of a bridge loan depends on what type you go for. These loans are short-term and designed for quick financing and payoff, so lenders tend to charge higher rates compared to longer loans, often 8% to 10% or higher.
And if you’re going with a home-secured bridge loan, plan for closing costs which are typically around 1% to 3% of the loan amount. Closing costs typically include things like an appraisal fee, origination fee, notary fee and more.
If you’re looking for a bridge loan line of credit, expect a variable interest rate, meaning the rate moves with the prime rate.
Compare alternatives to bridge loans
Bridge loans can be costly. There are other types of financing available that help with a life transition, such as a home equity loan or a personal loan.
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5 things to consider before getting a bridge loan
- Check your credit score and reports. Review your credit reports and credit score to see where you stand before you apply with lenders. Then you can search for providers that work within your credit rating and avoid wasting your time.
- Figure out how much you may need. If you’re buying a home, you’ll have an idea of the costs upfront. If you’re waiting for benefits to come in or moving into an assisted living facility, consider how long you’ll need expenses covered and how much per month.
- Consider the housing market. If you’re interested in selling real estate, you might want to wait until it’s a seller’s market before taking out a bridge loan. With a seller’s market, you could have more luck selling your home before your loan term is up.
- Shop around and look for discounts. There are many options when it comes to real-estate-based bridge loans. Read reviews and reach out to lenders to find out which one is the best option for you. Also many lenders offer a variety of discounts, such as a rate discount for setting up autopay.
- Consider alternatives. There are many other lending options available that may offer lower rates. Compare lenders and other types of loans before deciding.
Pros and cons of bridge loans
Like any borrowing method, there are benefits and drawbacks to consider.
- Quick funding. Many bridge loans offer fast financing, such as ElderLife, which advertises a turnaround time as soon as 24 hours.
- Flexibility. When you’re in the middle of life-changing transitions, flexible funding can make things smoother.
- Help with living expenses. If your funds are tied up or your awaiting benefits, bridge loans can help avoid issues with your current expenses.
- No prepayment penalties. Most bridge loans don’t penalize you for paying early. But definitely double-check with the lender.
- Rates can be high. Short-term, temporary financing can come with high rates compared to other types of funding, such as home equity products.
- Double closing costs. Real estate bridge loans typically mean paying closing costs on the bridge loan, around 1% to 3% of the loan amount. And if you’re buying another home, that means two times the closing costs.
- Fees can stack up. Bridge loans come with their own host of fees, which can include origination fees around 8% or more. And if you get a real estate bridge loan, there are even more costs to consider.
- Senior bridge loans are limited. There aren’t many lenders that offer unsecured bridge loans for seniors.
- Need at least 20% equity. For the real estate route, expect to need at least 20% of equity to qualify for a secured bridge loan.
4 alternatives to bridge loans
Compare other popular borrowing options to find the right fit for your situation.
- Personal loan. Unsecured personal loans can be used for the same purpose as a bridge loan, and many providers offer similar rates, amounts and terms.
- Home equity loan. If you have at least 20% equity in your current home, a home equity loan allows you to borrow around 70% to 80% of that equity in a lump sum. Home equity loans typically come with lower rates than bridge loans or unsecured personal loans, and are most often fixed-rate loans.
- HELOC. A variable rate line of credit that’s secured by your home, HELOCs are better-suited for borrowers that aren’t sure how much they need to borrow and have at least 15% to 20% of equity in their current home.
- Reverse mortgage. If you’re 62 or older, this option is worth exploring. There are many types of reverse mortgages, but in a nutshell, you borrow equity out of your home and receive monthly payments. Often, this borrowing method is used to supplement retirement income.