There are different types of loans.They all have pros and cons. Due to the differencesin these loans, the suitability of each type varies. A hard money loan has many advantages, and a good investor would know when to opt for one.
What is a Hard Money Loan?
As any Hard Money Lender would tell you, a hard money loan is a short-term loan that uses real estate as security. You can get one from a fund of investors or an individual private investor. One of the many differences between hard money loans and conventional loans is that you canonly get the latterfrombanks or credit unions.
Depending on the agreement between you and the lender, you can have a loan term spanning from 2-5 years. You could be paying just interest on a monthly basis. Alternatively,a pre-decided amount of principal can also be paid along with the interest. At the end of the loan term, you pay off the rest with a balloon payment.
The subject property that you already own and are using as collateral will decide how much money you can get as the loan. A property that you will be acquiring can also be used as collateral, instead.
A new real estate investor might be focusing on the pricing of a hard money loan. They inquire what a lender’s rate and points are. We can easily see that they have limited experience,and so do other capital providers. However, the real estate investment game isn’t just about the price! An experienced real estate investor would pay attention to the total cost. This is because they know that other costs besides rate and points could easily turn their profit into a loss!
Below we mention the usual and additional costs that should factor in your evaluation when considering a lender for your next project:
Interest rate
You’ll discover that the interest rates are higher on hard money loans because of the subsequent higher risk than the traditional lenders accept. It is usually 10 percent, but some lenders will also agree to 7% or go as high as 15-18%.
Up Front Points
Depending on the risk, the up-front points can go as high as 10. However, what remains constant is that they are higher for hard money loans than conventional ones. Besides the amount of risk, another factor that influences the points is the loan amount. A 3-point charge would be deemed appropriate for a loan of $500,000, for example.
Processing and Underwriting Fees
Your application and documentation will need to be processed. The lender will charge you a one-time fee for that.
Appraisal Fee
A licensed appraiser who does the appraising would need to be paid. The borrower, i.e., you, will be footing that bill.
Referral Fees
Any realtors or brokers who referred the hard money lender to you will likely charge their own fee, as well.
Hard money vs. easy money loans – A huge advantage
Hard Money Loans
- Price $60,000
- Renovation $35,000
- Closing Costs $5,000
- Total $100,000
With 5 points, a hard money lender will be asking you to pay $5,000 in the example shown above. Besides that, you would be paying interest. Suppose the amount decided was 15% interest, which would make the monthly payment to be $1,250.
The total cost to you for using hard money: $11,250 (for 5 points and a loan term of 5 months)
Easy Money Loans
You won’t be paying interest more than 8 – 10%. Even at 10% interest, in the example shown above, you’d have to pay $833.33 per month.
The total cost to you for using easy money: $4,166.65 (for a loan term of 5 months)
Clearly, you would pay more interest when it comes to hard money loans. However, there is no substitute for this type of financing when you need the money quickly. Besides this, you won’t need cash to get this kind of loan. Free property that’s worth the amount you want to borrow would be enough. Therefore, the biggest benefit of hard money loans is that they are approved based on the value of the property than the borrower’s qualifications.
It would be smart to remember that hard money loans can have higher upfront points, fees, and interest. Therefore, you should factor in all these additional costs to determine the actual cost of the loan. Moreover, it is likely that you stand to make a profit with the renovation or flip. Compare that against what you will be paying for the hard money loan. Only then will you get the actual figures for the profit you’d be
If you aren’t yet convinced about hard money loans, consider other advantages of hard money loans for investment.
If you consider hard money loans as a short-term way of financing, there is no faster route to funding. That’s why real estate investors prefer to use this method for house flips and renovation projects. To discover more information on hard money loans orto find a reputable hard money lender, you can check out this handy directory.
