Bridge Financing or Bridge loans are designed as a short-term lending option. This loan product has a much higher interest rate and is designed to be paid off once long-term financing is secured. Many use this type of loan when purchasing a new home while trying to sell their existing property. Since these loans are more complicated than conventional financing, many individuals become confused about calculations. Here’s how to calculate a bridge loan.
The bridge amount is the equity that is not available on closing. This is the amount that the purchaser is using as a down payment on their home. Therefore as an example:
If the purchase price is $450,000.00
Deposit amount is $100,000.00
The Bridge amount is $100,000.00
Typically the interest rate charged on the bridge amount is 2 – 5% higher than the bank’s posted 5 year rate. Today that rate would be 7.24% or approximately $26.71/day in interest charges. There is usually a set up fee as well of approximately $250.00.
Therefore, the cost of bridging for 2 weeks on a deposit amount of $100,000.00 would be approximately:
$378.00 in interest + $250.00 Set up = $628.00 plus the costs of carrying two homes and two mortgages.
Some of the tips when obtaining bridge financing would be:
1. Always ensure the bridge financing is taken for an additional 2 days than is required just as a cushion for holidays, bank requirements, etc.
2. The cost for bridge financing is done a per day interest charge however, the true COST of the bridge is
- The payment of the current mortgage of the property that is not yet sold
- The payment of the new mortgage on the property just purchased
- The interest on the bridge financing
- Other related costs to carrying two homes.