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.
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.
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.
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.
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.
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.
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.
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.
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%.
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.
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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