A bridge loan, at least in regards to residental real estate, is a short term loan that is usually used to bridge the gap between the closing date of a property being purchased and the closing date of the property being sold. This can happen for a number of reasons (the seller of the new property couldn’t provide a closing date that lines up with the sale of your current property; you want to do some renovations on the home you’re purchasing before you move it, etc).
Bridge loans are typically more expensive than conventional mortgages (to compensate for the additional risk), and depending on the length needed (usually as few as a couple of days to several months), and you can count on paying several additional fees (legal fees, bridge loan “set-up” fees, etc). In many cases, however, if you can’t get the closing dates of your new and old properties to line up, this is the best way to make it work (your other option is a large line of credit).
Here’s an example of how a bridge loan works:
[box]Price of your new home: $380,000
– Amount being mortgaged: $270,000
– Deposit: $5,000
= Bridge Loan Amount: $105,000[/box]
The bridge loan amount basically equals your down payment minus your deposit (since the lender is advancing the rest of the mortgage on the closing date of the home you’re purchasing). So if you need to bridge your loan from, say, November 15th to January 1st (47 days), the bridge loan would be calculated like this:
[box]Bridge Loan Amount: $105,000
Interest Rate: Prime + 3%
Bridge Loan x 6% = $6,300
$6,300 / 365 = $17.26/day
$17.26 x 47 days = $811.22[/box]
So it’s going to cost you $811.22 to bridge the gap between the two mortgage loans (plus whatever fees the lawyer & lenders may charge). Keep in mind you’ll also have to find a place to live in the mean time and incur those expenses as well! 😉
