How interim financing works
An interim or bridge financing loan is a temporary financing option designed to help homeowners “bridge” the gap between the time your existing home is sold and your new property is purchased. It enables you to use the equity in your current home to pay the down payment on your next home, while you wait for your existing home to sell.
Bridge loans are short-term solutions, typically less than one week in length, although they can be for as short a period they can extend for up to 30 days. To be eligible for a interim financing , a firm sale agreement (with all waivers in place including financing and home inspection) must be in place on your existing home.
Here is an example – your current home has a firm sale (all conditions waived) and the sale date is July 1st. You have purchased a new home and the purchase date is June 20th. You have $25,000 equity in the current home and that equity is needed as a down payment on the new home. A lender will provide a mortgage on the new home and will setup interim financing to loan you the equity from your home sale for the days of overlap. In this case that is $25,000 for ten days – from June 20th to July 1st.
There are some fees associated with interim financing but they are very reasonable – generally a set up fee of $250 and an interest cost accrued daily on the funds required. $25,000 for a period of ten days would equate to approximately $42.00 in interest costs plus the set up fee of $250 for a total cost of $292.00 for the ten day period. So quite a low cost for the benefit of being able to move into the new home and have a few days to complete the final move, clean up etc at the past home.
The law office handling the sale of the current home and purchase of the new home will also handle the interim financing details.
When you do sell, the law office uses the proceeds from the sale are used to pay back the interim financing and any accrued interest.