Hard money loans are often a go-to for real estate investors. As a quick and easy financing solution, hard loans make sense for many investors that need money now. Even with all the straightforward benefits of hard money loans, there are some instances where hard money loans aren’t the best option.
Choosing Hard Money Loans
If you’re debating whether or not to apply for a hard money loan in Hollywood, Florida, it helps to review the pros and cons of this financing option. The following guide will help you decide whether or not a hard loan is right for you.
Benefits of Hard Loans
Hard money loans are often one of the best options real estate investors have for hassle-free funding. Other benefits include:
- Quick Money
Other financing options often require a lengthy application process. Hard money loans allow investors to cut to the chase and find funding fast. After a simple application process, borrowers often receive the money within the same week that they’ve applied
- Lenient Requirements
Other funding options like conventional mortgages require borrowers to have a certain amount of credit, debt, and income. Though hard money lenders in Hollywood, Florida might ask for this information, they are generally interested in the type of collateral that will be used to obtain the loan. For real estate investors, their property is all that is required for collateral.
- Flexible Terms
Working with private lenders allows for more flexible terms. Since you will be borrowing from individuals and firms rather than banks, you are more likely to receive a custom loan designed specifically for your situation. For investors working with various property deals, this is often an ideal solution.
- Increased Investment Opportunities
Investors that use hard money loans know that they have easy access to flexible cash. This fact automatically opens up the amount of investment opportunities that they can take advantage of. Instead of missing out on a good deal because you lack the capital, you can apply for a hard loan and take on every opportunity that comes your way.
Pitfalls of Hard Loans
Though there are countless benefits with hard money loans, there are downsides too. Keep the following pitfalls in mind when considering hard loans:
- High Interest Rates
Hard money loans are known for their higher interest rates. Many investors have to pay double-digit interest rates on these loans. Though hard money loans won’t amass as much interest as a long-term loan might, this is still something borrowers must keep in mind with hard loans.
- Lack of Oversight
While the fact that hard loans are provided by private institutions is often seen as a benefit, it can be a pitfall when considering the lack of oversight. This lack of regulation makes borrowing hard money loans a bit riskier than it would be with a conventional consumer mortgage. While this doesn’t have to deter you from borrowing a hard loan, it should encourage you to be more discerning about which lenders you trust.
- High Fees
Much like the higher interest rates, hard loan lenders can charge additional fees. Many borrowers find that along with quick cash, their hard loans come with underwriting fees, origination fees, construction draw expenses, and early-payment penalties. For this reason, borrowers must clarify all of the fees upfront.
- Short Payback Terms
Though many investors view the short-term period of hard money loans as a benefit, this also means shorter payback periods. In many cases, the payback period is a year or shorter. In order to payback the loan, fees, and interest in a short period of time, borrowers will likely have to sell their property before the due date, refinance to a mortgage, or ask for an extension.
Always weigh the pros and cons before making a significant decision regarding the financing of your investment properties. In the right situation, hard money loans may be just the funding solution you need.