What is Hard Money Loans?
A hard money loan is a type of real estate loan. These types of loans are generally short-term loans, lasting from one to five years. They come from lending institutions that lend money based (for the most part) on the value of the property you’re using as collateral rather than your ability to repay. There are many types of hard money loans. They include:
This type of hard money loan is given to a borrower who wants to buy a home quickly with a goal of reselling or refinancing it. To get this loan, you must be approved for owning two properties at one time, even if it is for just a short period of time.
This hard money loan is intended to allow a real estate developer to start a new construction project quickly so they can resell or refinance it.
This loan allows you to buy a rehab home and refurbish it quickly so you can resell it and pay the loan.
This type of hard money loan allows home buyers who don’t qualify for traditional financing to purchase a home.
How Do Hard Money Loans Work?
As we mentioned earlier, hard money loans are a short-term loan, lasting for a few years. But unlike other short-term loans that require you to make equal payments each month toward principal and interest, hard money lenders only require you to make interest-only payments, and sometimes even no payments at all. You should, however, note that interest rates for this type of real estate loan are generally higher than those of conventional loans.
Benefits of Hard Money Loans
If a hard money loan will cost you more than a conventional loan, why should you use it? Well, here are the benefits of hard money loans.
Hard money lenders process loans more quickly than traditional loan lenders. You can get your funds within a week or less, in some cases.
Hard money lenders are also more flexible than conventional loans. Lenders don’t use a certain standard process when giving out loans. Instead, they handle each deal individually. Depending on the relationship you have with your lender, you may be able to get more funding than you qualify for and even adjust repayment schedules.
3. More Investment Opportunities
With hard money loans, you’ll have access to large amounts of fast, flexible cash, which you can use to make more deals.
Drawbacks of Hard Money Loans
While hard money loans are simple, they are not perfect. Here are the drawbacks of hard money loans.
1. Higher Interest Rates
Hard money loans come with higher interest rates compared to conventional loans. If you qualify for other types of loans, it’s advisable to avoid hard money. Aside from high-interest rates, you may also be charged an array of fees such as construction draw fees, origination fees and more.
2. Finding Reliable Hard Money Lenders Can Be Difficult
Getting in touch with hard money lenders can be difficult and time-consuming. This can delay your project.
3. Lack Of Oversight
There is little government oversight in the hard money loan world. Some lenders can take advantage of this and exploit you.
4. Short Terms
Hard loans come with short payback periods. If you can’t pay your loan on time, your lender may bump up the interest rate you pay, as a consequence.
Now that you know what hard money is, how they work and their benefits and drawbacks, we hope this information will help you make an informed decision. If you need a loan in Kent-Washington or have any questions, feel free to contact us.