Why is the loan term important?
Real estate financing often uses industry jargon and terminology that some applicants are not familiar with. Regardless of the type of loan that you are interested in applying for, you need to have an idea of what loan term you’re looking for. It’s critical, especially for hard money loans – to know what loan term you need to make your business plan work. Generally speaking, loan term is a broad term that describes the length of the loan. It can be used more broadly to describe things like: the loan amount, interest rate, prepayment penalties, etc, but specifically refers to the length of the hard money loan.
For example, in traditional residential loans – it’s common for the loan term to be 30 years. That means the lender is giving you 30 years to repay the loan. When it comes to hard money, loan terms are usually shorter. Generally, you can expect a hard money lender to offer a loan term of 6-24 months. This timeframe can range from one lender to the next. In addition, some lenders offer you the privilege of extending your loan after the term is over. Some extensions can last from 3-5 years.
Most residential loans you’re familiar with are fully amortizing. That means the entire loan balance is repaid over the term length. At the end of the loan term, there is no balloon payment. Hard money loans are different. Most hard money loans are interest only, meaning no principal is repaid during the term of the loan. The hard money lender’s principal is repaid at the end of the loan via a large balloon payment.
Because hard money loans have a shorter loan term, it’s critical borrowers have an exit strategy before they get a loan. There are many options when it comes to exiting, such as refinancing into a traditional loan, or selling the property. It’s important you’re aware of the loan term/due date, in order to avoid potential issues later. Never accept a hard money loan term without having a calendared business plan in place.
Hard money lenders will typically never issue loan terms until they’ve reviewed your loan proposal. The lender will ask for things like costs to develop/rehab the property, a timeline for completing the work, and more. Hard money lenders know you can’t obtain long term financing in the middle of a major project, and will customize the loan term around that fact.