Bridge loans, also known as gap financing or interim financing, are short-term loans designed to help borrowers bridge the gap between two transactions, typically the purchase of a new property and the sale of an existing one. Bridge loans are usually used to finance the down payment on a new property while the borrower waits for their current property to sell.
To use the bridge loan calculator, the user will need to provide the following inputs:
- Purchase price - The total cost of the new property.
- Cash available - The amount of cash the borrower has available to put towards the down payment.
- First mortgage amount - The amount of the first (or primary long-term) mortgage on the new property that the borrower plans to take out.
- First loan's interest rate - The interest rate on the first mortgage.
- First loan's term - The length of the first mortgage, typically 15 or 30 years.
- Bridge loan interest rate - The interest rate on the interest-only bridge loan.
- Anticipated bridge loan term - The length of the bridge loan, typically 6 to 12 months.
Once the user has provided these inputs, the bridge loan calculator will provide the following outputs:
- Bridge loan amount - The amount of the bridge loan needed to finance the down payment.
- Monthly interest-only payment - If the bridge loan requires the debtor to pay only the interest due, this output will display the monthly interest-only payment amount.
Click on the "Help" button for more details and an example.
Bridge loans may be risky
Bridge loans can be risky because they often come with high-interest rates and fees, and they are typically secured by the borrower's current property. If the borrower is unable to sell their property quickly, they may be unable to pay back the bridge loan, which could lead to default and potentially losing their current property. Additionally, the borrower may be subject to penalties if they are unable to pay back the bridge loan on time.
To minimize the risks associated with bridge loans, borrowers should carefully consider their financial situation and ensure that they have a solid plan for selling their current property before taking out a bridge loan. They should also shop around for the best rates and terms and avoid lenders who charge excessive fees.
Bridge loans are most commonly reserved for real estate financing though they don't have to be. A bridge loan is usually a short term loan that provide funds for purchasing an asset (such as a home) when the cash-on-hand along with the primary loan is not enough to pay for the asset.
For example, if you currently have $50,000 cash and a home that you are selling for $400,000 for which there is a balance on the mortgage of $200,000 and you plan to buy a home for $800,000, you might be a candidate for a bridge loan.
If the lending institution for the new mortgage requires that you put a deposit of 20% down, $160,000, at closing, you will not have the cash if the closing has not taken place on your current home. This is where a bridge loan can be used.
-$50,000 cash on hand
-$640,000 mortgage available
$110,000 covered by bridge loan
The new home mortgage will be $640,000 (800,000 - 160,000 = 640,000). The selling price less the cash on hand and the mortgage money available leaves a short of $110,000. This is the amount covered by the bridge loan. A bridge loan is typically an interest-only loan. This means you make only interest payments. The loan is also usually a short term loan offered at a higher interest rate. The idea is that once the first property is sold, the bridge loan will be paid off immediately from the $200,000 net proceeds from the sale of the first house.
That's the background. This calculator will calculate your total payment for the primary new mortgage and the interest-only bridge loan payment. The bridge loan has no term for it is due when the closing occurs on the first house. The only thing you have to know about the bridge loan is the annual rate of interest you'll be charged.
"Anticipated Bridge Loan Term? (#)" — Enter number of months you anticipate needing a bridge loan. That is, how many months you think it will be until you close on the property you are selling. This value does not impact the bridge loan amount. It impacts the payment schedule and charts.
This calculator makes these assumptions:
1) payment for both loans are made monthly
2) the bridge loan is an interest-only loan (payments never go toward principal)