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Interim Loan

DEFINITION

Short term loan, typically with a higher interest rate than standard loans utilized by a borrower prior to receiving long term cheaper financing.

EXPLANATION

When a borrower cannot quality for a conventional loan or needs immediate access to a mortgage he or she has the option of applying for an interim loan. An interim loan is a short-term loan that typically comes with a higher interest rate than standard loans. This may be a hard money loan or other private loan program.

An interim loan is a temporary loan secured with a higher interest rate. Interim loans are typically are typically utilized for the short term because the interest rate is higher. Once the borrower has the qualifications for a standard loan, they’ll typically refinance out of the program to a lower interest long term mortgage. Most interim loans are between a few months to two years. Most of the time interim loans are used for 1 year. Typically, interim loans are used to purchase real estate.

Interim loans are often referred to as a bridge loan because the interim loan is meant to bridge the gap between the period in which the borrower cannot qualify for a loan and the period that they can qualify for a standard mortgage. Most of the time, interim loans are utilized when a buyer is facing a deadline on the purchase agreement and have no choice but to get the interim loan or risk losing the deal. In situations such as these, it may be advantageous for the borrower to pay the higher interest in order to not lose out on the transaction. Interim loans are most commonly used by real estate investors who can’t risk losing a deal because of their inability to get financing in time.

Real Estate Investors and Businesses Use Interim Loans

Real estate investors and businesses use bridge loans to cover interim expenses such as purchasing a property or paying workers until they can qualify for long term cheaper financing. For example, imagine a real estate investor owns 5 properties and needs to sell one property in order to purchase another, the real estate investor might likely get an interim loan until he has the money from the sale to pay down the interim loan.

The most common instance a buyer would utilize a bridge loan is when they cannot qualify or have the time to get a conventional loan. In instances such as these, the borrower may opt for an interim loan, even if that means they have to pay a higher interest rate. Also, an interim loan is common when a borrower needs time to sell his existing home in order to buy another one. Without the money from the sale of his original property, he would need an interim loan to purchase the new property without losing out on the deal.

Pros and Cons of Interim Loans

While the main benefits of interim loans are easier loan standards, faster funding, the main reason borrowers use interim loans is because of the convenience of applying. In a traditional loan, lenders require hundreds of pages of documents, whereas in an interim loan, the required documentation is much less. Interim loan approvals are primarily based on equity and therefore do not require as much paperwork or income documentation.

The main con of an interim loan is that the interest rate is much higher than conventional loans. Typically, interest rates are nearly double standard market rates. In many instances however the increased cost of borrowing is offset by the desire of the buyer to purchase the property they need or get the cash they want.

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