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Fast Hard Money Loans
Hard money loans, are unlike conventional bank financing. These loans are considered, “privately funded loans,” as the requirements vary from one lender to the next. Hard money lenders are concerned with one thing: the collateral, and equity protection. Rates are higher than conventional loans, but funding times are faster, and loan criteria and repayments terms can be individually tailored. loans are referred to as a last resort, depending on your exact situation. Experienced investors know that if you want a property – you have to move fast. When you want to buy a property within a few days, a loan is the only way to do it. Traditional loans take time. It’s impossible to get a traditional loan approved in 3-12 days. Most traditional lenders take 1-3 months to approve you loan. Because loans are secured by real estate, they come with different guidelines. For example, credit score doesn’t matter in a loan. The lender only looks at your collateral. Traditional lenders however, will never give a loan based on collateral only. In contrast, lenders will. Traditional lenders care about your credit – whereas lenders do not.
The funds from a hard money loan come from hard money lenders who are interested in lending their money for interest. Hard money lenders charge a higher than average interest rate – compared to traditional institutions. The source of the funds can come from an individual, or a pool of investors, who invest in your loan. Often, many will pool their money and work with a commercial lending asset manager, or through a broker who facilitates the loan.
As a result, a hard money loan is used mostly by real estate investors who are interested in conducting transactions and need a source of money to leverage. Banks tend to not loan to investors, because banks want to make sure they’ll get paid back. Banks look at things like collateral, personal finances, and your credit score. lenders will often look at the LTV – loan to value – ratio, when evaluating your deal. Lenders prefer a low LTV – no more than 70-80%.
lenders are useful when time is off the essence. can help you capitalize on critical opportunities – with fast loans, with no credit/income verification checks. If you can’t get funding through conventional means – then consider speaking to a lender. It’s a great option for short term financing.
Typically, it can take 5-10 days to get funding for a hard money loan. Traditional banks take anywhere from 4-8 weeks. Lenders like Delancey Street can fund faster because our loans are funded directly. That means less paperwork, and less red tape involved in funding the loan. Moreover, you can get a loan even if you have bad credit! Credit is not an issue. You should, however, have a plan on how you will repay the loan. Our funding criteria is based on equity in the property and your payment repayment plan. We make loans to foreign nationals, and entities – who have no credit. Typically, we’ll ask you for an appraisal to help us understand the loan to value ratio.
When to consider a hard money lender
Borrowers should consider a loan, instead of a traditional lender, when you need quick access. Gaining access to this capital comes at a higher interest rate because the investor wants a higher ROI than investing it into bonds, savings account, etc. Moreover, the investor is aware a traditional lender won’t lend to you – and thus, he/she is taking on additional risk by investing in your project. Only turn to a lender if you REALLY need this money.
While you can go to a traditional lender instead of a lender, in most cases if you’re looking for a loan it’s because you have a questionable financial history. Banks look for collateral, good credit, and cash flow. Moreover banks will make you go through a rigorous application process, and take time to make a decision.
Understanding Hard Money Loans
Life is simpler if you can get a mortgage for your case. Unfortunately, sometimes it’s not that easy. Sometimes you need money ASAP for a real estate purchase. If you don’t qualify for a conventional mortgage, then we can help you. Loans are one of many solutions, available for unconventional borrowers. Are they right for you? If not, what’s a better option? Keep reading, and we’ll educate you on loans, and how to make an informed decision.
These loans are a type of real estate loan. They are based off the value of the collateral(the property itself), rather than your capability to repay the loan. Here are some types of loans:
BRIDGE LOANS. These are used to allow someone to buy property quickly, with the goal of reselling it, or refinancing it. These allow someone to buy a new property ASAP.
OWNER OCCUPIED LOANS. These loans allow consumers who don’t qualify for other types of financing to get a property for themselves.
CONSTRUCTION LOANS. These loans allow developers to get started on new construction projects, with the intent of refinancing, or selling it quickly.
Why Would a Loan Be Denied?
Hard money lenders are considered flexible, and open minded, in contrast to traditional lenders. While it’s true that loans have less stringent requirements versus traditional loans, you could still face some pushback. Hard money lenders will look at you, and your experience, and your business plan – very closely. Here are some things that might cause a lender to reject your loan request.
You Aren’t Putting Down Enough Equity
Applicants who plan on buying a property, or fixing and flipping, need to realize that lenders want to see you have “skin in the game.” lenders will evaluate your application, and assess the chances of you succeeding. They look to see how much equity you’re putting into the project. Delancey Street looks to see how much of a down payment you’re putting down, and how much risk you’re taking. Our ideal partner has just as much risk as we do. Lenders typically look to see if the applicant has enough cash to cover the down payment on the investment property. It’s important that you be able to demonstrate that you’ll be able to complete the project – financially speaking. Keep in mind that most lenders will only approve an application where the real estate investor is taking some risk/liability on his/her shoulders as well. If you expect a lender to take a 90-100% risk then it’s likely the loan will get denied. It’s important you have enough cash to cover the down payment, and other smaller bills that might arise in the future. Be prepared to show some proof of cash, so the lender understands you have a plan and won’t abandon the project.
It’s important you demonstrate to the lenders you have plan in place. Hard money lenders want to make sure they’ll get repaid. You have to show your plan, and how you’ll repay the loan in the future. When you accept a loan, you’re agreeing to a loan term – which means the loan has to be repaid within that period of time. If you don’t repay it, you forfeit ownership of the property to the lenders. Many lenders will refuse to lend you if you don’t have an exit strategy. It helps if you have cash reserves, or assets, in place to help cover the balloon payment in the event your plan fails. Most lenders prefer not to seize your collateral and sell it to settle the debt. They would rather get paid, and want to make sure the real estate investor they are working with is prepared to fulfill his obligations.
Not at all. While it is true, some borrowers are in distress when looking for – in many cases it’s investors who turn to hard money.
No. We don’t believe in application fees. We believe many lenders who charge application fees are often “middle-men,” who are simply looking to make money by charging application fees. They are not actually interested in funding your deal.
Yes, it’s 100% possible. Many real estate investors often use loans to buy a property. They wait for 6-12 months, and then refinance the property with a traditional bank loan. Because you’ve bought the property, you can now “wait,” for the bank to take 2-3 months to approve your loan.
Delancey Street only provides loans for real estate investment properties. We do not lend on properties that are owner-occupied.
No. We don’t look at your credit score. We only care about the investment property. We look at the specifics of your deal, and focus our decision making process on whether or not we think the deal will “work.” Delancey Street is less concerned about your financial history, and more concerned about the deal itself. Typically, we look to see how much money the deal can realistically make – based on data – and try to understand whether or not the real estate investor has the skills to pull it off.
Real estate investors who have established themselves as trustworthy are eligible for our pre-approval process. We’re very transparent and straightforward, and can provide proof of funds for investors who work with us.
Hard money loans aren’t available to everyone. Typically, they can only be used for investment purposes. If you plan on using a loan to buy your own home, then it’s unlikely you’ll get approved. loans are typically given for a term of 6-24 months only. While it’s possible to get a loan for a period of time greater than this, it’s unlikely to be cheap – or easy. Most lenders will expect a balloon payment at the end of the loan for the principal and interest. Rather than making payments each month (like a traditional lender would expect), this gives you greater freedom. is great if you a short term loan that is approved fast.
Most traditional lenders are ok approving 80-90% LTV loans. In contrast, lenders expect you to bring some of your own money to the deal. Each lender will require you to bring at least 20-30% of the overall loan amount to the table. Most lenders lend at around 50-60% LTV. Anything greater than that will generally involve greater scrutiny.
At Delancey Street, we firmly believe we’re partners first. We treat you how we’d want to be treated and that means being transparent and honest with you at every step. It’s hard to say you’ll get approved in 24 hours guaranteed. It’s simply impossible to make such claims. What we can promise you is never to play games, or delaying the process. We use a very sophisticated algorit to evaluate potential deals, and give answers quicker than other lenders. The faster you send us the info, the quicker we can evaluate and fund it. It’s common for real estate investors to get a conditional approval within 24-48 hours of us reviewing their application.
Most traditional lenders will not give you a loan for a fix and flip project. If the house is in poor condition, or there’s some other abnormality with the house, then a traditional lender will not give you funding. In addition, most fix and flip potential deals “go fast.” The seller is very motivated to sell the property, and will accept the first offer. Traditional private lenders take forever, so by the time the loan is approved – you’ve already lost the property since someone paid cash for it. If you have a lender on your side who can close a loan in 5-10 days, you can get the fix and flip property.
Most traditional and hard money lenders look at a borrower’s credit report. They verify your income, and investigate past delinquencies. It means that someone with a checked credit history will have a difficult time, and in some cases never get approved. When this happens, your only option is to work with a lender. While the interest rates for a loan are higher than traditional loans – if the deal makes sense, it might make sense to take the money.
Hard Money Loans 100% LTV
Each year in the United States, millions of homes are sold in transactions totaling hundreds of billions of dollars. The vast majority of these sales are reliant on some form of financing. The most common is the traditional home mortgage. Home mortgages allow potential home buyers to benefit by leveraging their available capital and getting them into homes that would otherwise require decades of saving to buy. The modern home financing industry is a finely oiled machine that relies on centuries of experience to get money into the hands of customers at rates they can afford. This is accomplished through strict lending standards, which ensure that mortgages only infrequently end up in a state of default. This is a great deal for the responsible and well-employed home buyer as it keeps rates and costs low while providing large sums in long-term financing arrangements. But there is a downside to the efficiency of the mortgage industry: Such stringent lending standards mean that many people are unable to qualify for a home loan. In the majority of cases, people who can’t qualify for a mortgage would be well-advised to find ways to improve their credit rating, increase their cash on hand and improve and diversify their sources of active income. For some buyers who are not able to secure mortgage financing, however, there may be alternatives to a traditional home loan.
Hard money can be a viable option where mortgages aren’t
For real estate investors who look for dilapidated or otherwise defective homes that can be bought on the cheap, fixed up and then flipped, hard money loans may be the ideal form of financing. Traditional mortgage lenders often steer clear of any deals that involve homes with serious impediments to their marketability. This often means that buyers specifically looking for fixer-uppers will not be able to secure traditional financing. For these borrowers, hard money loans can be the answer to their short-term financing needs. In contrast to mortgages, which are usually underwritten by huge corporate banks, loans are usually issued by individual investors or groups of local investors. This means that loans allow almost total flexibility in the way that the loan agreement is structured. Both borrower and lender have the latitude to include any term or omit any term that they would like. This means that hard money borrowers are often able to push even the most unorthodox deals through.
Hard money means fast closings
Perhaps the single greatest benefit of loans, at least for investors operating in fast-moving real estate markets, is the speed with which these loans can be finalized, and cash can be put in the buyer’s hand. In hot real estate markets, such as those seen across the United States over the last eight years, buyers who rely exclusively on traditional mortgages may find themselves severely hobbled by the slow-paced approval process. Traditional mortgages can take three months or longer to be approved. In the end, a significant number of applications will be rejected. In real estate markets where selling times are measured in weeks, if not days, sellers may be hesitant to deal with anyone who isn’t nearly certain to be approved for mortgage financing. This can put a huge number of potential buyers at a significant disadvantage. But for those using hard money loans, their ability to close deals is as good as that of cash buyers. For borrowers who have established long-term relationships with lenders, getting the purchase money wired to a sellers account can often take less than a full business day. This can give buyers using loans a decisive advantage in some of the country’s hottest real estate markets.
Hard money can save huge on out-of-pocket expenses
A $100,000 purchase using a traditional mortgage may involve $30,000 or more of out-of-pocket expenses. But a hard-money-loan purchase of the same amount would typically only require about $5,000 in initial cash outlays. In fact, many savvy investors can work out zero-down deals with their lenders.
Why does the lender need title insurance?
If you’re considering getting a hard money loan in Los Angeles, then you might be required to get title insurance. Hard money lenders work, and act, in a similar manner as traditional mortgage lenders. Some aspects of real estate investing and commercial lending are similar to buying a home. In both cases, someone wants to borrow money – and someone wants to lend money. It’s important in both business and residential transactions that both parties protect themselves.
If you’re getting a hard money loan, you’ll need to get title insurance. This is a key process. This protects everyone. Title companies provide a title commitment and tax certificate up front. This lets all parties know if there’s any existing liens against the property, or if any taxes remain to be paid. Lenders want to make sure there aren’t any issues when they give money for a transaction. In addition, this guarantees a lender that the loan is safe. The title insurance provides that safety.
Title insurance is a form of indemnification, which protects the holder from any losses sustained from issues in a property’s title. The most common type of title insurance is lender’s title insurance. With this, a borrower purchases it to protect the lender. Owner’s title insurance, which is paid for by the seller to protect the buyer’s equity in the property – is available in a separate transaction.
When getting a Los Angeles hard money loan, title insurance protects real estate owners and lenders against any losses, or damages, that occur from liens, encumbrances, defects in the title, or from issues with property ownership. Unlike normal insurance, which protects against future events; title insurance protects against claims for prior issues. Such claims can include things like property ownership by another party, fraud, or forgery of the title documents, lawsuits, loans, etc.
Having no title insurance will expose all the parties in the transaction to significant risk in the event there’s an issue with the title. Without title insurance the financial burden for the claim rests solely on the buyer. The title insurance with hard money – protects the buyer.
What is title insurance: It’s an insurance policy which protects the buyer against losses in the event title to the land isn’t valid. It’s insurance
Why do I need it: This protects the lender. The lender might insist on it, because in the event there’s a defect with the title his/her investment is protected. Title insurance even includes coverage for things like legal expenses which are necessary to investigate/litigate a future claim.
What does title insurance cost: The cost will vary depending on the value of the property. The important thing to remember is you only pay it once, so it’s a cheap investment – especially if the private lender is insisting on it. If you die, the coverage automatically continues for the benefit of your heirs. The coverage continues as long as you have an interest in the property. If you sell your property, giving warranties of title to your buyer, the coverage continues.
If the lender gets title insurance for its mortgage why do I need one: The lender’s policy covers only the amount of the loan, which isn’t usually the full property value. Getting title insurance will protect you for the full value of the property.
Everything You Need to Know About Hard Money Loans
Hard money loans may be a good option for those who need money fast to purchase real estate. It is a loan for real estate investors that is primarily based off the value of the collateral. Hard money loans do not focus on your ability to repay like banks and other financial institutions.
A fix-and-flip loan is for investors who want to buy a property, make quick renovations, and then sell the property to pay off the balance of the loan.
A bridge loan is for investors who want to buy a property quickly with the intention of refinancing or reselling the property. There are times when investors can take out a hard money bridge loan to purchase a property before they can get funds from the sale of another property.
These private loans are for individuals who were not able to quality for other finance options. An owner-occupied loan gives an individual the opportunity to purchase real estate for themselves.
A construction loan is for real estate developers who want to start a new construction project. Typically, these investors have a goal to refinance or sell the property quickly.
Because private lenders are private firms, they are able to consider a private loan on a case-by-case basis, and many lenders are open to issuing hard money loans for a variety of investment purposes.
How Hard Money Loans in Work
Hard money loans aren’t offered to everyone. Many lenders will not issue private loans for non-investment purposes. While some lenders may consider making private loans to consumers who want to use it for their private homes, it comes with a number of additional regulations.
Hard money loans are issued over a short time, which is typically less than two years. Most private loans have a 12-month term. With a private loan, a borrower will not make equal monthly payments toward the interest and principle. Instead, the borrower will is only responsible for interest-only payments.
What are the Perks of Hard Money Loans?
Real estate investors can take advantage of many perks that private loans have to offer. Hard money loans allow investors to get funds quickly so that they have the ability to receive funding in less than a week under certain circumstances. By having access to funds quickly, investors can snag a good real estate investment instead of missing out, which may occur if they go to a bank or other financial institution.
Hard money lenders also offer lenient requirements when compared to banks. Traditional mortgages have strict eligibility requirements that include good credit scores, low debt-to-income ratio, and source of income. While private lenders may check credit scores and income, which they are required to do by law, the main factor that determines eligibility is the collateral that is used.
What are the Eligibility Requirements for a Hard Money Loan?
Because the property that is used as collateral is the primary component of a private loan, the lender will typically want to have the property appraised. In addition, most private lenders will require a down payment. The down payment is usually calculated based on the current value of the property or the after-repair value (ARV).
Would you like to find out more about loans? We welcome you to contact us at Delancey Street. Our team can provide you with further details about our loan options.
Best Hard Money Lenders
A hard money loan is the ideal funding option for real estate investors when conventional funding is not suitable for their deal. Many real estate investors prefer using these loans because they can get the capital fast. In many instances, a loan can close within three to five business days.
Unlike banks and credit unions, lenders focus on the value of the subject property. They are not interested in scrutinizing the investor’s credit score. The subject property is used as collateral for the short-term loan.
There are several advantages associated with getting a loan. We will now take a close look at one of the most popular real estate financing options today. Let’s get things underway.
What is a Hard Money Loan?
It can be extremely difficult for you to get approved for a conventional real estate loan if the lender is not comfortable with your annual income and credit score. Traditional lenders are only interested in dealing with consumers that can show they are capable of repaying the loan on time. This is the primary reason why they have prospective borrowers fill out extensive paperwork. However, you can avoid this by pursuing a loan.
This is an asset-based loan or an equity-based loan. Funds for loans typically come from a private investor or a group of private investors. Your personal credit score is not a big issue, and you will not be asked to fill out a stack of loan documents. The lender will ask you to put up a large down payment. The significant down payment helps to lower the lender’s risk on the loan.
Hard money loans may not be for everyone, but they offer many advantages that are too hard to overlook. For example, it would make sense for you to get a loan if your credit score is extremely low. Please keep in mind that a loan comes with a higher interest rate and processing fees. Despite that, short-term funding will put you in position to buy residential and commercial real estate fast.
How do Hard Loans Work?
Hard money loans are designed for short-term situations. The borrower must repay the loan back within 6 to 24 months. This is fine for the investor because the interest rate for a loan is much higher than the interest rate attached to conventional real estate funding. Hard money loans are suitable for any investor that would like to do more deals with less capital. At the end of the day, the investor gets the golden opportunity to get a greater return on their investment.
What Makes Private Money Loans Unique?
Novice investors learn that hard money or private money is a better alternative to traditional real estate financing. Why deal with the bank’s strict lending requirements when you can get capital from a private lender with softer lending requirements? It doesn’t take a rocket scientist to see that short-term loans can help you become a successful real estate investor.
Here are three distinct advantages of getting hard money:
Faster Closing – If you are approved, you will not have to wait 30 to 60 days to get the funds for your deal. As we stated earlier, your loan proceeds can be disbursed within several days.
Softer Terms – A lender will not make you jump through hoops. The terms are simple and flexible. The subject property will be the main focus. Things should go well if the property does not raise any red flags.
Flexible Payment Schedules – Traditional lenders must follow strict guidelines. In most cases, they are unable to make changes to the repayment schedule. However, lenders can make changes to the repayment schedule with ease.
How Can You Get a Loan?
Submit your information to the lender after you have a property at hand. The loan process will begin after the lender gets your information.
Borrowers can never be too careful when applying for a loan. While loans are seen as the hassle-free way to access money for investment purposes, investors should be sure to choose the right lender.
Questions to Ask Lenders
Though there are many honest money lenders in the industry, investors must exercise caution when applying for a loan. It is important that you do your due diligence to find a lender that you can trust. Even though someone looks good on paper or online, this doesn’t mean that they’re the lender for you. Consider the following questions as you look for a lender:
- Does the lender work with owner-occupied properties?
Borrowers that are aiming to use their loan for their own residence need to ask this question. Though most lenders avoid giving out loans for owner-occupied properties, there may be a few exceptions.
- How are borrowers expected to repay the loan?
As there are various reasons one may obtain a loan, not all lenders have the same stipulations for repayment. Will you be expected to provide interest-only payments throughout the term? Are no payments expected? Is the full balance to be paid in a final balloon payment?
The answers to these questions may be the deciding factor when choosing one lender over the other.
- What are the interest rates?
Some lenders hide the details of their interest rates. If the information isn’t clearly displayed, be sure to ask the lender to clarify their interest rates. Once you have a tally of all the various interest rates from different lenders, you’ll be able to take the cheapest available option.
- What are the additional fees?
While some lenders won’t have additional fees, many do. Getting a clear answer to this question will allow you to make the most informed decision.
- What experience do you have?
With lending, it’s best to work with a lender that is experienced. This is especially true for borrowers that are new to loans. The more experienced the lender, the better an asset they will be as you navigate the lending process.
- What is your broker license ID?
Some hard money lenders s have to be licensed by their state in order to lend money. Only do business with someone that is properly licensed.
Watch Out for Loan Sharks
New borrowers are often the ones that fall prey to bad lenders or loan sharks. What may seem like a good deal with a loan shark can easily turn into an investor’s worst nightmare. Avoid these scammers by watching out for the following tell-tale signs:
- Illegal interest rates: Don’t be fooled into thinking that all lenders have the same interest rates. While it comes as no surprise that lenders charge exceptionally high interest, those operating illegally will charge rates that are beyond the usury limits. Review your state’s limits for interest rates if you believe a lender is charging too much for interest.
- Withholding information: Some lenders make a habit of not being completely honest with borrowers. While this isn’t always in indication of a loan shark, a lender that is actively withholding information likely isn’t the best person to work with.
- Practicing without a license: Though some loan sharks may have their license, it is a good practice to check a lender’s qualifications against the real estate bureau in your state. If you find their information on the website, you’ll at least know that they are operating legally.
While the process of getting a loan is often hassle-free, you’ll have to find the right lender first. If you’re ready to start taking advantage of this financing option, what better time to begin than today?
Pros and Cons of Loans
Hard money loans, also known as fix and flip loans, are short-term real estate loans usually borrowed without using traditional mortgage institutions. Borrowers intend to use the proceeds to build, repair or renovate a house before selling it for a profit, part of which is used to repay the loan. These loans are provided by individuals or professional real estate investors and have a payback period of one to five years.
How Do Loans Work?
Unlike traditional mortgage lenders who focus on your credit history before approving a loan, lenders are less concerned with your financial status. Lenders use the value of the home you intend to buy to determine the amount you are eligible to borrow and use it as collateral. In the event you are unable to repay the loan, the home is sold to recover the borrowed funds.
Before taking out a loan, it is crucial that you learn about their pros and cons. Getting ahead of the game instead of going in blind will go a long way to ensure the success of your investment.
Pros of Loans
Easier to Qualify
Hard money loans are more accessible to borrowers compared to traditional loans. Most lenders do not scrutinize a borrower’s eligibility requirements such as credit score and income level but only need the home as collateral.
This feature enables borrowers with a poor credit history or self-employed people to be eligible for loans.
Unlike traditional lenders who require borrowers to possess real estate experience to approve a loan, lenders do not need any prior industry knowledge. Even if you are a beginner investor in the house flipping business, you are eligible to borrow a hard money loan.
Quicker Approvals and Funding
Since lenders are only interested in the home as collateral, the credit approval takes less time. Traditional lending institutions require you to provide a mountain of paperwork that often takes a lot of time to scrutinize thereby delaying the loan approval process.
Hard money lenders only require you to provide the documents of the property you intend to buy to determine the amount you are eligible to borrow and then give you the funds. While traditional lenders approval may take up to seven days, hard money lenders can approve and provide the money within 24 hours.
Since private investors provide loans, the terms and conditions of an agreement are negotiable. Unlike the traditional lenders with strict borrowing policies, lenders do not have a standard underwriting process and evaluate every borrower individually.
Depending on your situation and negotiation skills, you may be able to tweak some terms of the agreement in your favor provided the lender conforms.
Personalized terms and conditions such as repayment schedules and loan fees might enable you to minimize the probability of default. If you are a regular borrower, you might convince your lender to provide a higher loan amount to flip more than one house. Multiple house flipping will result in higher profits.
Cons of Loans
Higher Down Payment
Hard money loans require borrowers to provide a down payment which is a percentage of the total credit line. However, the equity requirement in hard money loans is quite high compared to traditional loans. While the conventional lenders consider your credit score to determine the down payment, hard money lenders require you to provide 25 to 30 percent equity of the loan approved.
Higher Loan Costs
The interest rates charged by lenders are very high compared to traditional lenders. Since lenders do not look into the financial status of a borrower before approving a loan request, this is considered a high-risk level which is countered by imposing a higher interest rate. Hard money loan rates often range from 9 to 14 percent.
Also, borrowers are required to pay an extra fee for the loan referred to as points which is a percentage of the total loan approved. The points may fall anywhere between two and four depending on the lender.
Shorter Payback Period
Hard money loans have a shorter payback period compared to traditional loans. The payback period depends on the lender but majority fall between one and two years. Some lenders allow borrowers to repay the loan in three to five years, but the number is limited.
An extended payback period is riskier for a lender because of changes in prevailing interest rates. In the event interest rates decrease, borrowers may opt to refinance the loan at the lower interest rate. If the interest rates increase, borrowers continue repaying the loan at the initial interest rate. Both scenarios negatively affect the lender’s profit forcing them to reduce the payback period.