As you consider senior living options for yourself or your loved one, you might run into financial issues. Families can secure short-term financing by getting a bridge loan to help cover costs.
What is a bridge loan?
A bridge loan is a short-term loan that provides a financial “bridge” for the borrower until they obtain another funding source.
Bridge loans are often used in real estate for those buying a new home who have not yet sold their previous one. The bridge loan often covers the down payment on a new residence, and once the borrower sells their home, they can use those profits to pay back the bridge loan.
Bridge loan payments typically kick in about six months to a year after closing. Lenders will agree to terms with the borrower before issuing the loan to determine the best arrangement for both parties.
How a bridge loan is different from a home equity credit line
A home equity line of credit (HELOC) is a line of credit secured by a person’s owned property and borrowed against the available home equity. Borrowers can use HELOC funds in any amount up to their approved credit limit, and for any purpose, over a predetermined “draw period” (10 years on average) before they must begin repayment.
On the other hand, bridge loans are lump sums that borrowers must use only for what the lender approves — typically closing costs or other home expenses. The window before repayment is much shorter than a HELOC, typically a year or less.
When to use a bridge loan
Most commonly, homeowners use bridge loans to buy a new home before selling their current one. They can use their bridge loan to pay off their existing mortgage and cover some of the down payment on their new home. Once they sell their previous residence, they can use the profit from the sale to pay back the loan. In many cases, the lender who issues the bridge loan will require the borrower to finance their mortgage with them as well.
Bridge loans are beneficial for older adults who want to move into senior living facilities, such as assisted living communities or nursing homes, but lack the upfront funds. The loan can offset immediate costs until another funding source is available, such as profits from a property sale or VA benefits.
Bridge loan examples
There are various scenarios in which an individual would take out a bridge loan:
- • A person wants to help move their older parent to a senior living community before the parent’s home sells.
- • An individual needs to move to assisted living immediately but lacks the finances to cover any immediate payments.
- • An older adult needs to pay for rent and senior care while waiting for VA benefits to begin.
- • A business is looking to take advantage of real estate opportunities or acquire other businesses.
Pros and cons of bridge loans
Securing a bridge loan can offer flexibility to a family or individual needing immediate financial support for senior living or care. However, there can be some downsides to bridge loans.
Pros of bridge loans
- • You’ll achieve financial stability and flexibility while waiting for permanent funding to be available.
- • You’ll receive additional funds in the event of a time-sensitive situation.
- • You’ll have access to cash instantly.
- • There may be no monthly payment for a select period of time.
- • The application and approval process is quicker than typical loans.
- • You’ll have more time to make real estate decisions.
Drawbacks of bridge loans
- • Bridge loans may have higher interest rates and APRs than other loans.
- • You must secure assets as debt collateral.
- • You must pay debt services on your bridge loan in a shorter time period than a traditional loan.
- • Being unable to secure future funding can create more debt.
How much does a bridge loan cost?
The average cost of a bridge loan depends on its purpose. Bridge loans for real estate and business are often larger than those for senior care. Depending on your specific needs, you can receive a bridge loan for $5,000 to $50,000. Most borrowers can expect to pay up to 3% of the total loan amount in closing costs.
Interest rates can vary depending on the current prime rate, the amount you borrow, and your personal credit score. On average, bridge loan interest rates are in the 8.5% to 10.5% range, which is more expensive than conventional mortgages.
How to qualify for a bridge loan
To qualify for a bridge loan, you’ll need to have a secure line of equity, income, assets, and credit. Bridge loan lenders will need to verify the borrower’s income through W2s, tax returns, and pay stubs and ensure their debt-to-income ratio does not exceed 50%.
Most borrowers will need to have a credit score of 650 or higher to qualify for a bridge loan. Additionally, a borrower will need to use personal equity for the loan.
The ElderLife Bridge Loan
For those looking for financial support while transitioning a loved one to senior living, the ElderLife Bridge Loan can offer immediate relief while you wait for other funds to become accessible. ElderLife can provide $5,000 to $50,000 in as little as 24 hours. Additionally, multiple family members can join the loan, so the financial burden doesn’t fall on one person. Contact ElderLife Financial Services to learn if a bridge loan is right for you and your family.
