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Transitioning to retirement can take more work than you’d like. A move to a new home, assisted living facility or waiting for benefits to kick in can leave you high and dry. Bridge loans can help you compensate for those few months while your funds are tied up so you don’t have to put your retirement plans on hold. We walk you through how they work, what you can expect to pay and the risks involved.
Bridge loans are a type of short-term financing designed to cover — or bridge — brief gaps in funding. People most often use bridge loans when buying a new home while their current home is on the market. However, seniors might want to use bridge loans for other purposes.
It’s more common for seniors to used a bridge line of credit rather than getting a lump sum, though both are options. That’s because most costs that seniors use bridge loans for are reoccurring — like assisted living fees — and it can be difficult to predict how long you’ll need the financing for.
Bridge loans for real estate deals are typically secured by your home, but Elderlife Financial Services also provides unsecured bridge loans for other purposes. You can typically get access to between $5,000 and $500,000 and pay it back over a few months to a little over a year. Most people pay off their bridge loan as soon as the funds that were tied up come through — like money from a real estate deal.
Seniors might want to use a bridge loan in the following situations:
The cost of a bridge loan depends on what type you go for. If you’re borrowing from a lender that specializes in real estate bridge loans, you can expect to pay a variable interest rate between 0% and 2% plus a baseline interest rate like LIBOR or the Wall Street Journal Prime Rate. These loans are secured by your home, so you might have an easier time qualifying for a lower rate. You might also have to pay an origination fee, which is typically a percentage of the amount you borrow.
You can also get an unsecured bridge loan specifically designed to help seniors move into retirement communities through Elderlife. You can borrow between $5,000 and $500,000 and pay a variable interest rate that currently ranges from 9.49% to 16.24%. With an Elderlife loan, you’ll also pay an origination fee of 8% to 8.5% of the amount you borrow.
You can either choose from a bridge line of credit or a term loan. With the line of credit, you’ll make an interest-only payment of around $12 per month per $1,000 you draw. You’ll have between 15 and 18 months before you have to pay it off with either your VA benefits or funds from a real estate deal. With a term loan, you have up to 36 months before your loan is due, but you’ll be required to make payments on both the loan’s interest and principal.
Say a woman named Susan wanted to move into an assisted living community. Her husband was a WWII veteran and passed away several years ago. This made her eligible for $1,176 per month in VA benefits to help pay for her assisted living fees of $3,000 a month. She had enough funds to cover the rest of the costs, but needed that assistance right away.
After submitting her application, she decided to take out a line of credit with Elderlife to help pay her fees. She made interest-only payments of $14 for the first month, $28 for the second month, $42 for the third month and $56 for the fourth month, when her VA benefits came in. She then paid off her loan with that lump sum, plus the 8% origination fee of $376.32.
Susan’s $4,704 loan cost her $516.32 in interest and fees once the VA benefits kicked in.
There are. You can lose your home if you’re using a bridge loan to pay for a real estate deal that falls through or doesn’t sell by the time your loan term is up. On top of that, your credit can be ruined for defaulting on a loan and you likely won’t qualify for affordable financing for several years.
Using a bridge loan for veteran benefits can be relatively safer since you’ll get your benefits eventually. However, you might have difficulty paying off the bridge loan if you borrow a lump sum rather than taking out a line of credit and your funds don’t come through as soon as you’d anticipated.
Keep in mind that bridge loans can come with higher interest rates than some alternatives like personal loans or reverse mortgages. While this isn’t necessarily a risk, it means that it might not be your most affordable option for financing.
Bridge loans can be a great help when you’re waiting for funds to come through. However, they can be risky if you use them to cover real estate expenses since you could lose your home if it doesn’t sell before your term is up. They can also come with higher interest rates than other types of financing.
Want to learn about your other options? Visit our personal loans guide to compare lenders and learn more about how they work.
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