Transfer time is one of the most important service quality indicators for evaluating intermodal transit systems. In the advent of advanced public transportation systems, vehicle arrival times and transfer demand can be obtained in real time. Thus, the decision of dispatching vehicles at transfer stations can be optimized to reduce the transfer cost. A time-varying total-cost function, including connection delay and missed-connection costs incurred by transfer passengers and vehicle holding cost, is formulated as a function of holding times for vehicles that are ready to be dispatched at transfer stations. A procedure is developed to dynamically optimize the dispatching time for each ready vehicle by minimizing the time-varying objective function. A transit network consisting of four routes connecting at a transfer terminal is designed in this study to demonstrate the application of the dispatching model. The proposed method can be used to advance transit vehicle dispatching strategies and reduce the transfer time.