# How to Calculate a Bridge Loan

A bridge loan lets you buy a new house before you sell the one you own now.
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You are moving and you've found a great house to buy, but there's a problem. Your old property hasn't sold yet. That means you are still making mortgage payments and you can't use the equity in your present home for a down payment. One option to think about is a bridge loan. Bridge loans carry risks, but they can be a way to secure a new property when you don't have time to wait for the old one to sell.

## Function of a Bridge Loan

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Bridge loans are short-term financing vehicles intended to cover a gap between the time you purchase a new home and sell the old one. Six months is a typical time frame for a bridge loan. Homeowners use bridge loans to obtain cash for a down payment on a new house quickly. Some homeowners choose bridge loans to pay off mortgages and forestall foreclosure. The bridge loan buys these distressed homeowners more time to sell the property instead.

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## How a Bridge Loan Works

Suppose you are moving because your employer has transferred you. You go to a lender and take out a bridge loan against the equity in your current house to use as a down payment on a new house. The amount you borrow includes points, fees and interest points. Terms of a bridge loan vary. For example, some lenders allow you to borrow enough to pay off your old mortgage. Your current home is collateral for the bridge loan. When the current property is sold, the money pays off the bridge loan.

## Calculating Bridge Loans

To calculate a bridge loan, you need to know how much money is required as a down payment on the new property as well as the outstanding balance of the current mortgage. You also need to know the fees and points the lender will charge. Suppose your home is appraised at \$250,000 and the lender will allow up to 80 percent of that amount to raise cash and pay off the old mortgage, or \$200,000. The current mortgage balance is \$150,000. Assume this lender charges 2 points, meaning 2 percent of the bridge loan amount of \$200,000. Add 1 percent in prepaid interest and fees. Points and fees come to \$6,000. Subtract \$6,000 and \$150,000 from the \$200,000 loan amount. You have \$44,000 cash to make a down payment on the new house.