Understanding your bridge loan cost
The table below contrasts a bridge loan with a standard mortgage on the structural features that drive its higher effective cost.
| Feature | Bridge loan | Standard mortgage |
|---|---|---|
| Term | Typically a few months up to about a year | Typically 15 to 30 years |
| Payment structure | Interest-only; principal due at term end | Amortizing; principal repaid gradually |
| Interest rate | Generally higher, reflecting short-term risk | Generally lower for a comparable borrower |
| Fees | Origination fee is typically a larger share of total cost given the short term | Closing costs spread conceptually over a much longer term |
| Primary risk | The expected sale, refinance or other exit does not happen on schedule | Long-term rate, market and income risk over the loan's life |
- The effective annualized cost figure exists specifically because comparing a bridge loan's nominal rate alone to a standard mortgage rate understates the true short-term cost once the origination fee is included.
- This calculator assumes the loan is interest-only for its full stated term and that the origination fee is the only fee included; some bridge loans carry additional fees (appraisal, administrative, exit fees) not modeled here.
- Bridge loans depend on a specific exit strategy — typically selling an existing property or securing permanent refinancing — being completed within the loan term; this calculator does not model what happens if that exit is delayed beyond the term.
What is a bridge loan?
A bridge loan is short-term financing, typically running from a few months up to about a year, used to 'bridge' a gap between two transactions — most commonly, financing the purchase of a new home before the borrower's existing home has sold. Bridge loans are usually structured as interest-only, with the full principal due as a single repayment at the end of the term, generally once the triggering transaction (such as a home sale) is complete.
Because bridge loans are short-term and carry more risk for the lender than a standard long-term mortgage — including the risk that the expected sale or refinancing does not happen on schedule — they typically carry meaningfully higher interest rates than conventional mortgages, along with an origination fee charged as a percentage of the loan amount at closing.
The full cost of a bridge loan combines the interest paid over the term with the upfront origination fee; the effective annualized cost expresses that combined cost as a single annualized percentage, which is typically higher than the loan's stated nominal interest rate alone because it also accounts for the fee.
How to use this bridge loan calculator
- Enter the bridge loan amount.
- Enter the annual interest rate quoted for the loan.
- Enter the loan term in months — bridge loans are typically short, often well under a year.
- Enter the origination fee as a percentage of the loan amount.
- Read the interest-only monthly payment, the origination fee amount, the total cost of interest plus fee, the effective annualized cost, and the principal due at the end of the term.
The formula behind bridge loan cost
The monthly payment on a bridge loan is interest-only: the outstanding principal multiplied by the monthly interest rate, since no principal is repaid until the loan matures. The origination fee is a percentage of the loan amount, charged once at closing rather than spread across the term.
Total cost sums the interest paid over every month of the term with the origination fee. The effective annualized cost converts that total cost into a single annualized percentage of the loan amount, which is higher than the nominal interest rate alone because the fee is included and is being annualized over what is often a term shorter than a year.
Common mistakes
- Comparing a bridge loan's nominal interest rate directly to a standard mortgage rate without accounting for the origination fee, which meaningfully raises the effective annualized cost over a short term.
- Not having a concrete, time-bound exit strategy — such as a pending home sale or lined-up permanent refinancing — before taking out a bridge loan, given the loan's principal is due in full at the end of a short term.
- Assuming bridge loan payments reduce the principal — they are typically interest-only, so the full original amount remains due at maturity unless separately paid down.
- Underestimating total borrowing cost by looking only at the monthly interest-only payment and ignoring the origination fee due at closing.
- Using a bridge loan for a purpose with an uncertain or long timeline, when the loan's short term and interest-only structure are built around a specific, near-term transaction completing on schedule.
よくある質問
What is a bridge loan used for?
A bridge loan is short-term financing used to cover a gap between two transactions, most commonly to finance the purchase of a new home before an existing home has sold. It is typically interest-only, with the full principal due once the triggering transaction — such as the sale of the existing property — is completed.
Why are bridge loan interest rates higher than mortgage rates?
Bridge loans are short-term and depend on a specific future event, such as a home sale, happening on schedule, which lenders treat as carrying more risk than a standard long-term mortgage on an already-owned, appraised property. That added short-term risk is typically reflected in a higher interest rate and an origination fee.
What is the effective annualized cost of a bridge loan?
The effective annualized cost combines the interest paid over the loan's term with the origination fee, then expresses that total as a single annualized percentage of the loan amount. Because the fee is included and the term is often well under a year, the effective annualized cost is typically higher than the loan's stated nominal interest rate alone.
Do I make principal payments on a bridge loan?
Usually not during the term. Bridge loans are typically structured as interest-only, meaning the monthly payment covers only accrued interest, and the full original principal becomes due as a single repayment at the end of the term — generally once the borrower's exit transaction, such as a home sale, is complete.
What happens if I can't repay a bridge loan when it comes due?
This is the central risk of bridge financing, since the full principal is due at a fixed date regardless of whether the planned exit — such as a home sale or refinance — has actually happened. This calculator computes the loan's cost under its stated term but does not model extension options, default consequences, or refinancing alternatives, which depend on the specific lender and situation.
参考文献
- Consumer Financial Protection Bureau (CFPB). Your Home Loan Toolkit — a step-by-step guide to shopping for a mortgage. consumerfinance.gov.
- US Department of Housing and Urban Development (HUD). Buying a home: what you need to know. hud.gov.
- Freddie Mac. Understanding mortgage options and loan types. freddiemac.com.
- Brueggeman WB, Fisher JD. Real Estate Finance and Investments. 15th ed. McGraw-Hill Education, 2019.
- Brealey RA, Myers SC, Allen F. Principles of Corporate Finance (13th ed.). McGraw-Hill, 2020. Chapter 2: How to Calculate Present Values.