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.
First, what’s a bridge loan?
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.
What can I use a bridge loan for?
Seniors might want to use a bridge loan in the following situations:
- Moving to another home for retirement. Now that you’re no longer tied to a job, you might want to spend your retirement somewhere else. Taking out a bridge loan can help you afford the immediate costs of moving into a new house while your current home is still on the market.
- Moving into an assisted living facility. Transitioning to an assisted living facility can be expensive — there’s monthly fees, entry fees and other costs involved with moving. A bridge loan can help you pay for all that while you’re waiting for your house to sell.
- Waiting for veteran benefits to kick in. Veterans can get between $1,176 and $2,169 per month from the VA to help cover pay for assisted living costs or at-home care. However, it can take as long as 18 months before you start to see those funds. You can cover those costs in the meantime by taking a bridge loan — you’ll get a lump sum covering the time from when you applied to when you’re approved.
How much do bridge loans cost?
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 RateThese 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.
Elderlife senior loans
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.
Case study: Susan takes out a bridge loan
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.
Are there any risks?
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.
6 tips to get a competitive bridge loan
- Check your credit report first. Before applying, request a free copy of your credit report from any of the top three credit bureaus: TransUnion, Experian and Equifax. Look it over to make sure that there aren’t any mistakes that could hurt your credit score. If you find any, reach out to the creditor and the credit bureaus to correct the error.
- Calculate how much you might need ahead of time. If you’re buying a home this is easy — you’ll have an idea of the costs upfront. If you’re moving into an assisted living facility, you might have to add up your monthly financing needs and estimate how much time you’ll need help with that. If you’re applying through Elderlife, they can do this for you.
- 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. Elderlife might be your only option for getting a bridge loan for VA benefits. But you have plenty of other options when it comes to real-estate-based bridge loans that could potentially come with lower rates since they’re secured. Read reviews and reach out to lenders to find out which one is the best option for you.
- Read over your application for mistakes. An easy way to get turned down is to have inaccurate or contradictory information on your loan application. Read it over a couple times and consider giving it to a family member to look at.
- Sign up for autopay if possible. Not only do many lenders offer a discount on interest to borrowers who sign up for automatic repayments, it can make your life a lot easier by giving you one less thing to worry about each month.
Compare alternatives to bridge loans
Bridge loans are a highly niche product — only a few providers offer bridge loans for seniors and options are pretty limited. Some seniors might want to consider an unsecured 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.
Select your credit score range and state to compare personal loans you might qualify for. If you plan on paying it off when a retirement benefit kicks in, ask the provider if they charge a prepayment penalty before you apply.
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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