If you have ever been looking for a loan, especially if you have had trouble getting one, you have likely heard about hard money loans. This alternative form of lending can be a valuable option in some cases. However, it is important to know what to expect for interest, term and other characteristics. A little insight can help you make better decisions when you borrow.
Term Length
Typically, hard money loans carry much shorter terms than conventional loans, especially mortgages. The possible maximum term depends on the lender. However, some hard money loans are as short as three months. Many have terms of close to three or four years.
This short term will typically mean that the fees and interest are higher, even if you get the best possible rates. With fewer payments, a short loan is less profitable than a long one for the lender. Therefore, they seek to make up the difference in other ways.
Interest Rates
Again, interest rates vary and depend greatly on the borrower. However, they are typically higher than the current interest rates for conventional loans.
Expect to pay between 8% and 14% in interest for a hard money loan. Despite this higher rate, the cost of the loan may not be as high as you expect. Since the term is relatively short, the interest does not have as much time to add up. Therefore, it is quite possible to use a hard money loan without paying a huge amount in interest.
Nonetheless, before working with private money lenders for residential real estate, make sure to calculate the cost of the loan. As with all financial decisions, it is best to do the math before you decide to borrow.
Other Fees
As with other real estate loans, hard money loans have some fees associated with them. These are typically described in points. One point is equal to 1% of the loan amount. Hard money loans may have two to 10 points associated with them. Some lenders offer better deals than others. Make sure to include the points in your calculations.
Depending on the type of hard money loan, you may need to also make a down payment. This is to ensure that you have skin in the game. This may be as high as 30%. However, in some cases, you may be able to make a significantly lower down payment. Speak with the lender to learn your options. Keep in mind that you will likely have to pay more in other ways if you have a low down payment.
Get Started
Try working with some California hard money lenders to learn what you may be able to receive for terms and interest. The right lender can help you to realize all your real estate goals. People use these loans to fix and flip properties, buy investment homes and pay for new homes. Although it can be intimidating to use a loan other than a conventional mortgage, there are some significant benefits to pursuing a hard money loan. Learn more about them to make an informed decision.
