When some investors hear the phrase “hard money loan” they tend to get nervous and think about shady lenders and unseemly business practices. They also think about paying sky high interest rates on short-term loans.
There may have been a time when hard money lending had a negative reputation. But that is all in the past. Hard money loans are much more popular and a lot safer these days.
We’ll tell you about these loans, the best properties to buy with these loans, expected interest rates, and more. So stick around to discover how to leverage hard money for real estate deals.
The Truth about Hard Money Loans
The best definition of a hard money loan is one that’s considered a short-term loan. But the specific purpose of this loan is that it is made by being secured by real estate. And the funding comes from private investors, not a typical mortgage lender or financial institution. Although private loans will occasionally come from a fund of investors.
The terms of this loan are very different than your traditional 15 or 30 year mortgage. This is a short-term loan, meaning that it will typically last for a specific short amount of time. On average, you can expect the life of the loan to last for:
- 12 months
- the loan can have the terms extended for another 2 to 5 years
So again, this is very different than a typical mortgage. And the way the loan is repaid is very different from a typical loan.
At first, you are only going to pay one of two types of payments. The structure of your loan could consist of:
- interest only payments and a balloon payment to pay off the principal
- heavy interest payments with small principle and a balloon payment to pay off the rest of the principal
As far as paying the principal goes, this will typically happen at the end of the term of the loan. So you must have the capital available to cover paying off the loan in full at the end of the agreed-upon term.
Also Read: Can You Flip Property With No Money Down?
The Best Types of Properties/Deals for Hard Money Loans
Obviously, if you intend to purchase a home and own it for the next 30 years a hard money loan is not the right choice. But there are other situations when this loan makes a great deal of sense. The ideal situations for a hard money loan acquisition include:
- loans for land purposes
- loans for construction
- buying property to fix and flip
- short-term loan if you have credit issues
- short-term borrowing to act quickly in an effort to acquire an excellent deal
Expected Interest Rates of Hard Money Loans
On average, you can expect to pay anywhere from 10% to 15% interest depending on the terms coming from the specific lender. And the points on the loan could go from 2% to 4%, which works out to about the percentage of the total borrowed.
Again, other factors are involved like loan to value ratio and the particular lender themselves. So these terms are just average ballpark figures and nothing is set in stone.
In conclusion, taking out a hard money loan is a good idea in some situations but not all of them. Read through this information again to determine if you are the right candidate for leveraging hard money for real estate deals.