At some point, many seniors find themselves in a situation where it’s necessary to think about pursuing a lifestyle free of home ownership stress. They might want to live in a place where they can comfortably be cared for by another person, but either never married, lost a spouse early, or have a partner in a similar situation.
Nursing homes, home care, and assisted living facilities can be a great way to solve these problems, and senior bridge loans are an excellent way to quickly secure sound financial backing that can be paid off later. These loans typically have high interest rates and are usually enabled by collateral, such as the senior’s real estate or inventory.
What are senior bridge loans?
A senior bridge loan is a form of short-term financing that helps families provide senior loved ones with a new living arrangement while they await a more permanent financial solution.
Senior bridge loans last between one and 18 months, depending on the company’s offerings and the family’s needs. They function much like a line of credit on a credit card and contain terms that are simple to understand for seniors and their families, thereby freeing families up to focus on securing proper care for their senior loved ones. Interest rates are tied to the prime rate, which is the rate that banks charge their preferred customers. While variable, bridge loan interest rates trend higher than rates on other loans.
To recap, here are some essential things to know before you purchase a senior bridge loan for your senior loved one:
- Senior bridge loans offer significant financial support to help a senior’s family in situations such as moving a senior loved one to an assisted living environment
- These loans last between one and 18 months, though that duration can be longer
- Terms on senior bridge loans make them functionally similar to a line of credit
- Interest rates are typically higher than for other loan options due to the loan’s short duration
Who Qualifies for Senior Bridge Loans?
When a family determines that a senior loved one needs to move somewhere they’ll be properly cared for, bridge loans offer them the luxury to free up money for several months while they await a property sale. For example, the senior veteran in your life may be waiting for approval of veterans benefits such as the VA pension, or awaiting the sale of real estate other than their home. They may also find themselves needing a way to fund a reverse mortgage for financing long-term home care, or may need financial assistance to transition into an assisted living or skilled nursing environment. In each of these scenarios, a senior bridge loan can ease the financial burden for the senior’s family.
When the borrowing family is selling the senior’s home, the lender will observe the housing market to determine how quickly the home will sell. If it’s not currently a seller’s market, the borrower could face difficulty selling their home. In that case, the lender might determine that a bridge loan option isn’t a good fit, because the family wouldn’t receive money from the home sale to repay the bridge loan in a timely manner. The lender will also need to check the family’s collective credit history, because each family member is considered a co-applicant. Of course, a low credit score won’t instill the lender with much confidence in the family’s ability to make payments—and as a result, the prospective borrower may not qualify for a loan. Bridge loans are also intended to be short-term solutions, so the lender will need to know what source of funding will be used to pay off the bridge loan and when it will become available.
The Market Always Wins
Lenders will observe the housing market to make sure co-borrowers can reliably sell their home.
The More Funding, the Better
It’s crucial to show the lender that you and your co-borrowers have another source of funding to pay off the bridge loan.
Great Credit Matters
The better the borrowing family’s credit history, the better chance they’ll have of securing a senior bridge loan.
Different Types of Senior Bridge Loans
There are two types of senior bridge loans available, and each has unique terms which can be to your benefit—or detriment. Read on for a quick summary of the two basic senior bridge loan types and the advantages and disadvantages of each.
A closed senior bridge loan has a fixed repayment deadline that is agreed upon by the lender and borrowing party. Since lenders have more confidence in when the loan will be repaid (typically within just a few months), closed bridge loans are more likely to be accepted. In addition, these loans have lower interest rates because the terms of the loan are less open-ended—the lender knows precisely when the co-borrowers will repay the loan, so there’s no need to charge extremely high interest rates.
- This loan is typically much shorter than other forms of bridge loans because there is an agreed-upon end date
- Interest rates tend to be low, making the prospect of taking out a closed bridge loan more attractive
- Applicant parties often choose this loan when they know exactly when they can access proceeds from the senior’s home sale
Open senior bridge loans have no fixed repayment date, hence the name ‘open.’ But even without a hard end date in the loan’s terms, it’s typically agreed that this loan will only be offered for a period of 12 to 18 months and paid off within that same time frame. These loans are preferred by borrowers who are confident that their home will sell quickly, but have uncertainty about when proceeds of the sale will be made available to them. Lenders charge borrowers high interest rates for open senior bridge loans due to the borrowing party’s uncertainty surrounding their financial situation.
- Open senior bridge loans charge higher interest rates to compensate for the borrowing party’s lack of certainty of their financial situation following a property sale
- These loans are common for borrowers who rely on the undetermined future sale of a property to acquire the funds necessary to pay off the loan
- If the borrowing party knows when they can access proceeds of the senior’s home sale, an open senior bridge loan can lead to unnecessarily higher interest rates
How do Senior Bridge Loans Work?
True to their name, senior bridge loans bridge the gap when a family lacks financing to purchase living assistance on behalf of a senior loved one. After purchasing the senior bridge loan, the borrowing party quickly receives the tax-deductible loan amount and typically has between one and 18 months to complete their payments. These loans tend to offer borrowers funds more quickly than other loans, as the family must provide the lender proof of how they plan to pay back the loan ahead of time.
Throughout the loan period, the senior’s family directly sends payments to the company that will be providing the senior with their new care arrangement to prevent misuse. Lenders frequently allow borrowers to repay a senior bridge loan in a lump sum at the loan’s expiration date—though paying monthly installments is also an option. In addition, borrowers can draw extra funds from the loan’s approved total as necessary, and only pay interest on the amount drawn. For example, the family could take out a sum to help pay for relocation and any other incidental costs that arrive throughout the process of shifting the senior’s living arrangement. Finally, once funds from the sale of a home or some other source are received, the family then pays off the remainder of the senior bridge loan.
Before then, here’s a recap of what all families should know about taking out a senior bridge loan:
- Families purchase senior bridge loans to financially access living assistance for a senior family member while property is being relinquished through a sale
- Borrowing families can pull from the offered sum to pay for living transition costs
- Loans can be paid in a lump sum, or in installments
- Senior bridge loans can be paid off within a period of one to 18 months
Tax Implications of Senior Bridge Loans*
Any interest on senior bridge loans purchased for the explicit purpose of providing care for a senior loved one is wholly tax-deductible. Otherwise, it’s best to assume that all income received as part of a senior bridge loan should be reported as taxable income.
Now that you understand the senior bridge loan basics, you and your family will be better prepared to take out a senior bridge loan that is priced and scaled appropriately given your income level. Work with your financial advisor to understand the available options given your credit score and financial history, then determine whether taking out a senior bridge loan makes sense as a way of easily transitioning your senior loved one to a home that can make their golden years more manageable.
- A senior bridge loan can help the family of a senior purchase living care when they need funds while they wait for a property on the market to sell
- A senior bridge loan typically lasts between one to 18 months
- Open senior bridge loans are preferable for borrowing parties who are unsure when they’ll have access to suitable funds
- Closed senior bridge loans are excellent solutions for borrowers who are confident that the property they have on the market will sell by a specific date
- Senior bridge loans typically have high interest rates because the lender cannot fully be certain that the borrower will be able to successfully pay their mortgages and the bridge loan
- The borrower’s eligibility is determined by a number of factors, including credit history and availability of a funding method
If you’ve done the research and a senior bridge loan just won’t work to offer your senior loved one the long-term care they need and deserve, turning their life insurance policy into cash with a life settlement could be a better solution. Visit our life settlements page to get started selling their policy to a dedicated life settlement provider.
*Disclaimer: Retirement Genius does not offer tax or legal advice. This material has been prepared for informational purposes only and should not be relied upon for tax or legal advice. Retirement Genius strongly urges you to consult with your own tax or legal advisors before entering into any transaction.
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