A bridge loan’s interest rate usually starts at 1-2% but can go as high as 25-30%. The interest rate on a bridge loan is the fee the borrower pays to the lender to cover its processing costs and enables the lender to make money from the transaction. The level of interest is determined by the type of bridge loan, which could be a lump sum or a line of credit, as well as the lender’s terms. The loan period is also a factor.
Although bridge loans are more often associated with mortgages, many lenders offer this option to seniors looking for a short-term loan to pay their care costs while they wait for their long-term financial solution to begin. For example, they may be waiting for the sale of their home to be completed, for the first payment from their long-term care insurance plan or for the approval of their veteran pension benefits.
How Are Interest Rates on a Bridge Loan Determined?
From the lender’s perspective, multiple factors determine the borrower’s level of risk. Lenders require a great deal of evidence from borrowers to work out their debt-to-income ratio, which is an indicator of the person’s ability to manage their monthly payments. This evidence includes their level of income, credit score and home equity (the difference between what they owe on their home’s mortgage to what they’d get if they sold it).
Lenders have varying terms and interest rates, and not all approve bridge loans for senior care. Therefore, it’s prudent to consider multiple providers who will loan for this purpose. Although each contract is unique, it’s common to find the interest rate to be slightly above the prime rate and to incrementally increase every quarter until the loan is paid.
What Affects the Total Cost of a Bridge Loan?
The bridge loan itself is not the only cost a potential borrower must factor into their overall budget. Lenders typically charge fees for services linked to the loan. Some of the most common include:
- Commitment fee: This is a non-refundable fee imposed by the lender for their commitment, regardless of the outcome.
- Funding fee: This fee for the funding varies depending on the length of the loan, with borrowers who pay off loans earlier receiving a discount.
- Conversion/rollover fee: The borrower may pay a fee if the bridge loan isn’t refinanced and converted to a long-term loan.
- Administrative agent fee: The agent receives a fee for the loan’s length, which is typically included in the monthly payments.
- Processing costs: These are the lender’s costs for arranging the bridge loan and are typically 0.5-1% of the loan amount.
Bridge loan interest rates can vary greatly between lenders, so it makes sense to shop around. Seniors should also know many factors that will impact their costs, such as the lender’s perception of their level of risk, the loan period and the current market rate.
