If you’re a real estate investor short on cash or with a rocky financial past, hard money loans can be a lifesaver. They’re quick to approve, unlike traditional banks that drown you in paperwork. With hard money lenders, you can get money fast, which is perfect for urgent property deals.

But beware: These hard money loan rates can be high because they are riskier for lenders. They need their money back sooner, so they charge more. As of 2024, rates are around 9.5% to 12% for first loans and 12% to 14% for second loans. More lenders are joining the game, offering better terms to attract borrowers.

What Are Hard Money Loans?

Hard money loans are short-term loans for people who can’t get regular bank loans. They are mainly used for real estate or when you need to buy something fast. Instead of looking at your credit or income, these loans are backed by the value of the property you’re buying.

Understanding Interest Rates, Points, and Fees in Hard Money Loans

Hard money loans often have higher interest rates compared to regular bank loans. That’s because they’re riskier for lenders since they’re usually given to people with low credit scores or much debt. In addition to interest, lenders may also charge points and fees to cover their expenses and make a profit.

Points are fees charged by the lender, usually shown as a percentage of the loan amount. For example, one point on a $100,000 loan would be $1,000. You pay these points upfront, and they’re not refundable. Fees can also include appraisal fees, loan origination fees, and processing fees.

Application of Interest Rates

The following are some scenarios that explain how lenders decide to impose hard money interest rates on loans.

  • Calculating Total Payment for Your Loan
    To figure out how much you will pay for a hard money loan, you will need to know the interest rate, loan amount, and loan term. For instance, if you borrow $100,000 at a 12% interest rate for 12 months, your monthly payment would be around $9,333. This payment covers both the loan amount and the interest but doesn’t include any extra fees or points.
  • Getting Discounts on Your Interest Rate
    Sometimes, lenders offer lower interest rates to specific borrowers or if you pay back the loan early. While this might seem like a good deal, make sure you understand all the terms. Some lenders might ask for a fee if you repay the loan early, which could cancel out any savings from the lower interest rate.

Calculation of Interest Rates

  • Factors to Think About While Estimating the Rate
    When you are trying to figure out the interest rate for a hard money loan, there are a few things to think about. These include the loan-to-value (LTV) ratio, how long you’ll have the loan and your credit score. The LTV ratio compares the loan amount to the property’s value. Usually, the lower the ratio, the better the interest rate.
    How long you will have the loan matters, too. Shorter loans usually have higher interest rates than longer ones. Your credit score can also affect the interest rate—lower scores often mean higher rates.
  • Understanding Yield Spread Premiums
    Yield spread premiums are fees that lenders pay to mortgage brokers to find borrowers willing to pay higher interest rates than usual. Sometimes, these fees can help borrowers, but they can also be used to make the lender more money by raising the interest rate. It’s a good idea to talk to your lender or broker about yield spread premiums so you understand how they affect your loan.

Final Remarks

Hard money loans are great for fast cash or if you can’t get a regular bank loan. But they usually have higher interest rates, fees, and points. Make sure you pick a trustworthy lender, understand the loan terms completely, and steer clear of mistakes that could hike up your costs.

For more information, consult our real estate loan experts at Red Door Funding. Call us at (832) 539-1099.

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