How they work:
Hard money loans are based on collateral. This means that if the borrower defaults, the lender is able to get their money back by selling the collateral. Unlike traditional loans where the individual’s financial position is most important, the value of the collateral takes precedence in these situations. Hard money loans are typically offered for short periods of time (around 12 months). Rather than making equal payments every month, they allow individuals to make only interest payments. Along with these short lengths, benefits of hard money loans include quick financing and a short and simple application process. Because of this they are often attractive options for real estate investors.
How they differ from traditional bank loans:
Hard money loans are vastly different from traditional bank loans. As mentioned earlier, one of the biggest differences is that they are based on collateral rather than an individuals ability to pay the lender back. They also have much higher interest rates and shorter repayment periods than traditional bank loans. The approval and application process is often more simple and quicker than that of a traditional bank loan.
What are Typical Interest Rates?:
Many individuals avoid hard money loans because of the high interest rates they charge. It is not uncommon for interest rates on a hard money loan to range from 10-15% (https://retipster.com/hard-money-101-everything-need-know-getting-started-hard-money-loans/). While the rates are high, the benefit is that they are charged for a short period of time. Along with interest rates, there are also fees to consider with a hard money loan. These may include loan origination fees, underwriting fees, prepayment penalty fees and others. Be sure to ask the right questions and shop around between lenders when considering these fees.
Types of Hard Money Loans:
There are many types of hard money loans that are used for different purposes. Some popular options include:
Owner-occupied loan: This type of loan is often an option for homeowners who are purchasing a new home that they plan to live in rather than use it as an investment property (https://firstbridgelending.com/first-bridge-owner-occupied-loans/).
Bridge Loan: This type of loan is often used until an individual gets permanent financing or removes a current obligation (https://www.investopedia.com/terms/b/bridgeloan.asp).
Construction Loan: Construction loans are used to finance the building of a home. They cover the costs of building the home before long-term financing is obtained (https://www.investopedia.com/terms/c/construction-loan.asp).
Fix-and-flip loan: This type of loan is often used to purchase and renovate property that the buyer intends to renovate and resell (https://fitsmallbusiness.com/fix-and-flip-loans/).
Is a Hard Money Loan Right for You?
Hard money loans are certainly not for everyone, but can often be useful financing tools for real estate investors. They are quicker and often easier to obtain than traditional loans, which often makes them a good fit for individuals who either have a poor credit score, or need money quickly.
Before deciding to take out a hard money loan, it is important to do your research. Come up with a plan on how you will pay off the loan and be prepared to share that with your lender. To find a hard money lender who is right for you, research lenders in your area who lend money based on collateral. Real estate investor groups are a great source for this information.