Bridge Loan Calculator: How to Calculate Your Monthly Payment on a Bridge Loan
Bridge loans are becoming a popular choice for financing when you find yourself stuck in a cash crunch or between property transactions. Calculating your monthly payments on a bridge loan is vital before entering into any agreement. Fortunately, there are online calculators available to assist with this task.
Bridge loan calculators can estimate overall costs by entering information such as interest rate, loan amount, and the repayment period. Knowing these details allows you to determine more accurately whether a bridge loan is the most suitable option for your financial situation.
What is a Bridge Loan?
A bridge loan is a type of short-term financing designed to cover costs until long-term funding can be secured. Often used in real estate transactions, a bridge loan provides immediate financial support for those who are between transactions and require financing quickly.
Many industries also use bridge loans to finance acquisitions or restructure their balance sheets. Generally, these loans carry higher interest rates than conventional financing but tend to be more flexible and provide quicker access to capital when longer-term solutions are needed.
Bridge Loan Formula and Calculation
Bridge loans are provided by lenders such as banks and private investors alike and are calculated based on the borrower’s expected liquid assets, credit score, projected cash flow, and current real estate opportunities. That said, every lender is different, and some will have additional costs to be added to the calculation.
A basic example of a bridge loan calculation with possible fees is as follows:
You find a property you like, but you’re still waiting for your previous property to sell. The new property asking price is $1,000,000, but you can only front $600,000 because the rest of your capital is tied up in your current property. You require $400,000 to cover the shortfall before it’s sold to someone else.
Net Loan Amount | $400,000 | $400,000 |
Interest | 8% (6 months) | $16,000 |
Origination Fee | 1.5% | $6,000 |
Underwriting Fee | $1,000 | $1,000 |
Appraisal Fee | $1,000 | $1,000 |
Closing Cost | 2% | $8,000 |
Total Repayable | $432,000 |
What Is the Typical Payment Structure and Term on a Bridge Loan?
A Bridge loan payment structure commonly consists of regular interest payments due throughout the loan term plus a balloon payment to cover the remaining principal at the end.
The interest is significantly higher than most conventional mortgages or loans, and on average, bridge loans present repayment terms ranging between 6 – 18 months and, in some cases, up to two years. Balloon payments are required upon reaching the end of the loan term, where some or all of the remaining principal must be paid off in full.
If all contract parameters are met, these loans can provide great flexibility for individuals looking to purchase new assets or restructure existing debt promptly.
Are Bridge Loans Amortized?
Traditional amortization is not normally available with bridge loans, as lenders are often unwilling to take on any long-term risk. Most bridge loan agreements involve repayment of the loan in full at its expiration date (balloon payment). However, some lenders may offer borrowers the option of amortizing their initial debt over time.
Potential borrowers must consider all relevant details before signing any agreements regarding bridge financing. Having a clear understanding of the terms and conditions associated with the loan can make or break a transaction.
When Should You Get a Bridge Loan?
A bridge loan can be a great financial tool when you are looking to conserve capital. This type of loan bridges the gap between an existing debt obligation that must be met and a new debt obligation that needs to be taken care of in the future. It is also commonly used to finance a new commercial or residential property before selling another.
Getting financing for the interim period, until the already planned obligation can be fulfilled, can help provide relief for cash-strapped businesses or individuals. Typically, it is best to use a bridge loan whenever you expect a short-term liquidity crunch or have other unavoidable circumstances requiring quick access to finances.
The Costs of Bridge Loans
Taking out a bridge loan can be essential to financing your property purchases. Still, it’s important to know the associated costs. Typical bridge loan expenses include:
- An origination fee
- Closing costs
- Appraisal fees, which vary depending on the type of collateral being used to secure the loan
- Interest charges
When closing a bridge loan, expected closing costs are typically between 2 – 5%. An origination fee is typically 1.5 – 10% of the loan amount. Additional fees may be levied if extra services, like loan extension beyond terms or additional underwriting support, are needed.
Depending on the amount of money you need, these costs can add up quickly. Therefore, it’s essential to understand all the associated costs before deciding to take out a bridge loan.
Who Is Eligible for a Bridge Loan?
Eligibility for these loans largely depends on the type of borrower and their financial situation. Usually, those with excellent credit are eligible. But even those with fair credit could be in line for bridge financing if they possess substantial assets that could be used as collateral against the loan amount.
Additionally, they must prove that their desired investment is expected to generate sufficient returns upon completion for it to become self-financing.
Is There a Difference Between a Bridge Loan and a Hard Money Loan?
While a bridge loan and a hard money loan may appear similar on the surface, there are significant differences to consider when weighing your financing options. Bridge loans are designed to cover short-term financial needs, such as offering a quick solution for buyers who need to purchase a new property before their existing property is sold.
Meanwhile, hard money loans usually carry higher interest rates and require more stringent eligibility criteria for borrowers. Typically, these loans are used by real estate investors who want to purchase properties quickly with little paperwork or with particular circumstances requiring extensive proof of the borrower’s ability to repay.
Recourse vs. Non-recourse Bridge Loan
Recourse and non-recourse bridge loans are financing options commonly used by real estate investors when they need to close a transaction quickly. Where a recourse bridge loan puts the investor’s personal assets, such as their home or current investments, up as collateral, a non-recourse bridge loan only requires collateral from the property itself.
While a non-recourse bridge loan is often more expensive than recourse loans, it limits personal risk and offers more flexibility to borrowers. That said, there can be important benefits to using either type of loan, so investors must consider their options carefully before making any financial decisions.
When Should You Pay Off Your Bridge Loan Early?
When evaluating whether an early payoff makes sense, it’s vital to consider any fees associated with prepayment and additional costs that may arise due to extended debt (like extra interest payments).
If you have the funds available and don’t expect the bridge loan to help you increase future revenue, it makes sense to pay it off as quickly as possible. Not only will this save on interest payments, but it can also help remove some of the uncertainty associated with financing from outside sources and provide peace of mind.
Additionally, suppose you can refinance your property at a lower rate than what your bridge loan is offering. In that case, it could be more beneficial to pay off the bridge loan early and replace it with another form of financing.
How to Extend the Length of a Bridge Loan
While these loans are beneficial for achieving goals or accomplishing projects, their term can come and go extremely quickly. Fortunately, extending the length of this form of loan is possible without having to refinance completely.
Speaking to an experienced financial advisor or the loan advisor that initially helped you with your loan will help you understand the options for extending bridge loans, whether locking in a lower interest rate, diversifying payment schedules, or restructuring existing debt.
On top of that, ensure that your payment history on all other loans is up-to-date and in good standing, which could help your case when negotiating.
