What Is Interim Financing?

It has become commonplace to buy and sell homes throughout one’s life. But the logistics of this process can actually be difficult. In order to obtain sufficient funds to purchase a new home, often a buyer will need the proceeds from selling their first home. But, selling their first home prior to buying their second home means they are without a residence for the space of time it takes to close. The result is a residency conundrum, forcing the buyer to either save enough for an additional down payment or rent for a span of several months. For this reason interim financing is available.

Lenders recognize the difficulty of this particular situation and are ready to help. Short-term loans designed to bridge the gap between homes are called an interim mortgage. The potential buyer of a new home can approach the lender and receive an amount equal to the amount of cash they will be receiving from the sale of their first home. The borrower puts this loan amount towards their second home, allowing them to move in immediately. Then, after the sale of their original home is complete, the received amount can be used to pay off the interim loan, converting the borrower’s position into a standard mortgage situation.

Apart from the residency dilemma, interim financing serves another purpose when attempting to purchase a home. If a buyer finds a perfect home at a competitive price, it is safe to say that the home will not be on the market for an extended period of time. If that same buyer knows that he/she is to receive financing after several more months of waiting, an interim loan can once again bridge the gap. The short term loan can give the buyer the opportunity to secure the home instead of risking the wait, and when the finances are available shortly thereafter, the buyer repays the loan and once again has a standard mortgage situation.

 Mortgage lenders find interim financing to be advantageous to them as well. There is usually a loan fee, ranging from $250 to $700. Additionally, the interim loan is completely separate from the first or second houses’ mortgages, and so it has its own interest rate. This interest rate is usually higher than the final mortgage’s rate will be, but because of the limited amount of time that the loan is active, the additional cost is minimal to the borrower. Because of the fees and the additional interest earned, lenders can increase their profits and so will be eager to help the borrower through this method.