Many seniors find that as their care needs increase, living in their own home is no longer their best option. Moving to an assisted living facility or downsizing to a smaller home may be appealing. For many seniors, especially those among the 48% who have no funds saved in a 401(k), finding the funds to pay for long-term care can be challenging. Selling the family home is one option for paying for senior care, but in areas where the property market is slow-moving, seniors may face a long wait to unlock their equity. Bridge loans provide seniors with an easy way of accessing the money tied up in their property while they wait for a sale to go through.
This guide looks at bridge loans, who might want to use them and the pros and cons of using this type of financing.
What Is a Bridge Loan?
A bridge loan is a type of short-term property financing that lets property owners access funds while they’re waiting to sell a property or refinance to a longer-term debt. Bridge loans are used in many scenarios, allowing people to buy property at auction or under market value, or fund a move while waiting for the proceeds of a sale to come through.
Seniors can use a bridge loan to let them move into an assisted living facility while they wait to sell their home. The loan provides access to a lump sum that’s repayable in full at the end of the term.
Frequently Asked Questions About Bridge Loans for Seniors
How do bridge loans work?
Bridge loans are typically offered for a period of one to 18 months. The interest is bundled into the price of the loan. Many lenders allow the loan to be repaid as a balloon payment, or in one lump sum, when the term expires, instead of requiring ongoing monthly payments. Bridge loans can usually be arranged quickly in comparison to mortgages, because the person applying for the loan can demonstrate they have the capital required to pay it back.
Why choose a bridge loan?
Bridge loans allow people to unlock the equity they have in their home. If a person wishes to move in to a nursing home or assisted living facility as soon as possible, or even downsize to a property that’s easier to maintain, a bridge loan can free up the money for several months or even a year of care while the sale of the property goes through.
This makes a bridge loan an appealing option for seniors who have a house in an area where the market moves slowly. These loans may also be helpful for someone who has found a buyer for their property, but doesn’t expect the sale to be completed for several months.
What is the difference between a bridge loan and a traditional loan?
Bridge loans differ from traditional loans in a few ways:
- The amounts available are usually larger
- The loans are typically offered over a shorter period
- Repayment is done towards the end of the term, rather than in monthly installments
- The loans are based on the value of the property, rather than the borrower’s income
- Interest rates are usually lower
This makes bridge loans more accessible, and more affordable, to seniors who are no longer working and need to borrow a significant amount to pay for a new house or to access long-term care.
What are the different types of bridge loans?
There are two types of bridge loans: open bridge loans and closed bridge loans.
An open bridge loan is a loan without a fixed end date. These loans are typically offered for 12-18 months and can be repaid at any point before the end of the loan period. This makes them a good option for seniors who expect to complete the sale of their property fairly quickly, but wish to have some flexibility or financial buffer while they wait for the proceeds of the sale to come through.
Closed bridge loans have a fixed repayment date. These loans are offered on terms of just a few months. Because they’re short-term, they tend to be less expensive than open bridge loans.
Are there any risks with bridge loans?
Bridge loans are offered as a short-term form of finance, on the condition that the borrower has a clear path to repay the loan. This is usually the sale of their property, although there may be other options such as the sale of a business, an inheritance or some other significant source of funding.
Bridge loans aren’t entirely risk free. If you take out a bridge loan secured against your property, and plan to refinance or sell the property but are unable to do so, you still need to pay the loan back.
If you can’t pay the loan back you run the risk of your home being foreclosed on. If this happens, the lender is likely to sell it at below-market value, leaving you with no home and less money than the property was worth.
For this reason, it’s important to perform due diligence on your property, getting surveys and valuations and seeking financial advice before taking out a bridge loan.
How much can I borrow?
Bridge loans are usually for larger amounts of money. The amount you can borrow is based on the value of your home, with most lenders willing to loan up to 80% of a property’s value.
Can I get a bridge loan if I have bad credit?
It is usually possible for someone with bad credit to take out a bridge loan, although they may have to pay a higher interest rate than someone with good credit. It’s wise to seek advice before borrowing, and get quotes from several lenders to get the best deal.
Is a bridge loan a good choice for me?
Bridge loans can be a good option for seniors who need to access funds to pay for their long-term care, but they’re not the only option. Personal loans may be a lower-risk choice for someone who has good credit, and there are other secured loan types and reverse mortgages that may provide more flexibility.
Those on a fixed or low income and who have limited assets other than their primary home may not need a bridge loan at all if they qualify for a Medicaid waiver to help cover the cost of their care.
If you’ve been contacted by someone offering a bridge loan or any form of secured credit, don’t rush to make a decision. Seek advice from a neutral third party to ensure the financial product you choose is the one best suited to your circumstances.
