A bridge loan is a short-term loan that borrowers use to finance expenses during a period of transition. They’re secured by a home and are typically repaid within three years or less. Bridge loans are often interest-only loans, which means the borrower pays only the interest portion until the home sells, at which time they repay the principal balance. They can be structured in many ways, but commonly are offered as lines of credit that the individual can tap when needed.
Retirees can use bridge loans in a number of ways. One common way is to pay for assisted living while waiting for proceeds from a home’s sale. The retiree uses the funds from the loan for the buy-in or monthly fees until the home’s sale closes.
That’s just one way to use a bridge loan. Here, we’ll explore some common ways to use this financial tool to tap the equity in a home during retirement. We’ll also address some frequently asked questions about using bridge loans.
Using Bridge Loans When Entering Assisted Living
For many retirees, living in an assisted living community provides needed help and companionship, but making the move from living at home to a senior community can bring many expenses. In addition to the monthly fees for assisted living, many communities charge an entrance fee. Seniors may also need to pay to move their belongings to their new home.
These expenses can be difficult for a family. A bridge loan provides a temporary influx of cash to use for these moving expenses. It allows the family to move the senior to their chosen assisted living community, then provides a period of time to repay the loan. Often, selling the home where the individual had been living provides the funds to pay off the bridge loan and start paying for senior care.
Buying Time When Selling a Home
Preparing a home for sale and marketing the property once it’s ready takes time. Sometimes, seniors and their families find themselves in a time crunch due to tight finances, which can result in taking a poor offer just to sell the home quickly. Using a bridge loan during the period of time when the home is on the market can protect against this. The senior will have needed funds, and the family can wait for the right buyer and offer to come along.
Filling the Gap While Waiting for Veteran’s Benefits
Veterans often qualify for a pension from the VA. They may also be eligible for benefits through the Aid and Attendance program. These benefits can provide important income for senior veterans to use to pay for retirement living expenses.
Unfortunately, it can take quite some time to get VA benefits after qualifying for them. The average wait time is around 9 months. Sometimes, it can be over a year. During the period when a veteran is waiting to receive these important benefits, a bridge loan can fund the expenses they face.
Veteran’s pensions are retroactive, which means when the benefits do begin, the veteran will receive back payments that are owed. These can be used to repay the bridge loan.
Paying Unexpected Expenses
When living on a fixed income, unexpected expenses can be a challenge. Whether it’s a large medical bill or the need to travel to visit a loved one unexpectedly, these expenses can be difficult to cover without additional income. Seniors who are happily aging in place can use a bridge loan to cover these expenses, giving themselves a little extra time to find the funds to cover the cost.
Finding an Alternative to a Reverse Mortgage
A reverse mortgage is often used by seniors to pay for living expenses while aging in place. They also work well for families where one spouse is moving to assisted living, but the other plans to remain in the home. A reverse mortgage is a good choice for those who need to access funds for five years or longer. If the need is more temporary, such as if both of the homeowners are moving into assisted living together, it doesn’t always make financial sense. Instead, the individual can choose a bridge loan to cover those expenses for the short-term.
Frequently Asked Questions About Using Bridge Loans in Retirement
What is the interest rate on a bridge loan?
Bridge loan interest rates vary from lender to lender. Borrowers should always find out the rate before signing for the loan. These loans do tend to have higher interest rates than those with longer terms because the lender needs to make an income on the funds over a shorter period.
What are the risks of bridge loans for retirees?
Taking out any loan involves risks, and bridge loans are no exception. Often these loans are taken out in hopes of selling a house. If the house doesn’t sell before the loan’s term expires, the borrower is left with a large balance to repay. These loans can also have high origination fees and are more expensive overall than home equity loans or lines of credit.
How do payments work on bridge loans?
Bridge loans are often interest-only loans, which means all the borrower pays is the interest charge each month. This can make the monthly payments quite affordable, but it also means a large lump sum is due when the loan term is over.
What are the eligibility requirements for bridge loans?
Loan eligibility varies from lender to lender, but the factors considered usually include:
- Credit score of all applicants
- Liquid assets
- Income
- Home equity
- Alternative funding source that will repay the loan
Do bridge loans require a cosigner?
Having a cosigner isn’t a requirement with a bridge loan, but it’s common practice. Typically, lenders want to see enough income and potential funding to repay the loan, which a retiree on a fixed income may not be able to provide. By cosigning for the loan along with an aging parent, adult children can help them get the funds they need to pay for assisted living or other costs.
