Interim financing is a kind of short-term loan—from 6 months to 5 years, usually being around 3 years—that can be used for real estate purposes. They usually come with the expectation of later taking out long-term financing. If the loan is terminated early and not converted into long-term financing the debtor can in some cases be charged a prepayment penalty. Interest rates on these loans are usually adjustable over the term of the loan, but sometimes they are fixed rates.
Interim financing is usually done to finance continuing expenses on a piece of development real estate, since the investor may not want to yet get any sort of permanent financing on the piece of property. A real estate investor who takes out interim financing may also use the loan obtained to purchase property without needing to sell other pieces of property, as would most often necessarily be the case.
One type of interim loan, often used in property loans and mortgage loans, is the gap loan. This sort is used to make up the difference between a maximum permanent loan and a floor loan.
Regulations on interim financing do vary from state to state and area to area, but in many cases there is a large number of development projects that can receive interim financing. For instance, projects financed through PWB lease-revenue bonds, GO bonds, and some lease-revenue bonds might be able to get interim financing.
Before obtaining any type of interim financing an investor should look closely at the implications to determine which financial institution and what sort of financing is right for them.
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