Hard Money Loan Explained:
A hard money loan can be used to purchase hard assets, such as real estate. While lending hard money loans, hard money lenders prefer using the borrowers’ investments as collateral rather than depending on their creditworthiness. Hard money loans are never lent by banks; rather, they are offered by financing companies, investing groups, and individual investors.
The available funding options for real estate investors to purchase mixed-use buildings are plentiful. This includes short-term private bridge financing as well. When investors are unable to secure bank financing for any reason and want to consider alternatives, they count on hard money loans. The risk of losing profitable opportunities is mitigated through hard money loan rates, so it is a powerful tool for investors.
Hard money loans can be both beneficial and risky, depending on individual situations. Investors usually prefer hard money loan rates when fast funding is required to secure a mixed-use property deal.
Hard Money Loan Mechanism: How Does it Work?
Hard money lending works on a simple principle: if the borrower fails to pay the loan, the lenders will take possession of their property to get back their money.
Hard money lenders are usually private companies or individuals who find potentially risky ventures valuable and are ready to invest.
Unlike bank loans, which are approved after a week or even months, hard money loans can get approved faster, sometimes in just a few days.
Hard Money Loan Rates as of 2024:
Compared to regular mortgages, hard money loan rates are usually higher and have a tight deadline. The rates were somewhere between 9.5% to 11.99% in 2024. On the other hand, the interest rates of traditional mortgages were from 6.95% to 10.5%.
Higher interest rates are one of the reasons short-term investors and flippers prefer hard money loans. They intend to repay the loan in a short period. However, a lower-rate loan may work better for others. The calculation of the hard money loan rates depends on numerous factors, such as the balloon payment, the origination fees, the property, and the applicant’s qualifications. Hard money lenders set their pricing according to the mentioned factors, along with the exposure to risk.
Terms of Hard Money Loan:
Hard money loans are best known for their flexible nature. However, the loan terms may vary in each case, depending mostly on the lenders. Borrowers are required to pay the balloon payment at the end of such loans. As a result, monthly payments become more affordable and generate more cash flow for the investment.
Pros of Hard Money loans:
Flexibility in the Loan Terms:
Hard money loans come with flexible terms, unlike bank loans. For mixed-use developments, this factor works as a convenience, as terms can be easily adjusted according to the unique circumstances of borrowers. Generally, hard money loans are written for a year, but in the case of high-vacancy properties, borrowers can get a 24-36 month term.
Fast Funding in Just a Few Days:
One of the primary benefits and reasons investors opt for hard money loans is fast funding. They can close pretty quickly; sometimes it only takes three days in case of a borrower’s hard deadline. Usually, it takes around 10-14 days for most transactions.
A three-day closing of hard money occurs in specific cases, often when the bank denies loan credit at the last moment. Such situations require the borrowers to fully prepare their loan file with title, vesting, escrow, payoffs, down payment funds, earnest money deposit, appraisal, and other financial documents.
Loan According to the Value of the Asset:
Hard money loans are determined after careful consideration of hard assets, i.e., the real estate. They are different from private money loans that are based on the hard asset value and review the building and the borrower’s financial performance, such as credit background, experience, and liquidity.
Appraisal Requirements on a Case-by-Case Basis:
For hard money loans, appraisal requirements vary on a case-by-case basis. There are many individual trust deed investors who don’t need a formal appraisal. In such cases, lenders may want to inspect a site or talk to the borrower during a walkthrough at the property. Alternatively, lenders may also opt for a Broken Price Opinion (BPO) or ask a real estate broker with more knowledge about the area to understand the subject property.
Cons of Hard Money Loan:
High Interest Rates:
Although hard money loans are faster to get, the borrowers pay the price in terms of higher interest rates. This is one of the major drawbacks of hard money loans; the interest rates are usually higher than banks or CMBS loans. High interest expense cuts into the profitability or return on investment of the mixed-use development.
High Upfront Fees:
Other than high interest rates, the upfront fees of hard money mixed-use mortgages are higher in terms of points and other loan charges. Experienced investors who are habitual to using hard money know well about the higher upfront fees.
Short Repayment Period:
Not all borrowers find it easy to sell their property or refinance to repay the loan in the span of 12 months. When it comes to private loans, one can get them extended to 36 months, depending on the circumstances. However, hard money lenders prefer to turn their money over every 12 months; thus, they lend 12-month loans. The risk of default increases with the period the loan is out.
FAQs – Hard Money Loan Rates:
- Are hard money loans specific to high-risk investors?
No. Experienced developers also used them for speed and strategic leverage.
- Do better borrowers get better hard money loan rates?
Of course. Pricing and fees can get lower for a borrower with a strong track record.
- Can a borrower refinance into a cheaper loan later?
Yes, investors often refinance after their property stabilizes.
Final Verdict: Is a Hard Money Loan the Right Choice for Your Investment?
For real estate investors looking for short-term funding and fast closing, hard money loans are quite suitable. What needs to be kept in mind is the higher cost that follows. Usually, investors use hard money loans under certain circumstances and as a bridge to an expected result. The best way to figure out whether a hard money loan is right for your upcoming investment is by getting a quote from a hard money lender and figuring out hard money loan rates. Want to build passive income? Visit Loanlocker today!