How to Calculate Hard Money Loan Interest Rates
Do you own property in the United States and want quick, customizable financing? It's essential to understand "hard money loan interest rates" if you want to generate income real estate investing. But what does a hard money loan mean? Hard money loans are short-term loans secured by assets, primarily used by real estate owners.
The primary factor that distinguishes them is that the lender is more concerned with the property being used as collateral than with the borrower's credit score. Most of the time, private investors or lenders, rather than traditional banks, provide these loans. This makes them faster and more flexible ways to get money.
This blog is essential because investors can make informed choices and secure the best deals for their projects if they understand how interest rates on hard money loans are calculated.
You can work with Commercial Lending USA as a correspondent lender, a table lender, or a real estate financial consulting firm. We have been an investor for 30 years. We know how hard money loan rates work and how they can affect your bottom line.
We can help you access the funds you need, thanks to our extensive network of over 200 private lenders and investors. We also offer helpful financial advice to assist both new and experienced real estate buyers in navigating the complex world of real estate finance.
What Exactly Are Hard Money Loans
To reiterate, hard money loans are a type of loan that can only be secured by real estate. In contrast to traditional loans, the screening process often pays close attention to the property's after-repair value (ARV), not just its current market value. For this reason, they are perfect for jobs where renovations or new construction will add value.
Key Characteristics:
Short-Term Loans: Hard money loans are typically designed for short-term use. Their terms are usually very short, ranging from 6 months to 3 years. This is significantly different from standard mortgages, which typically have terms that last for decades.
Asset-Based Lending: Collateral is the most critical aspect of hard money loans. The property itself is the primary factor used to determine who receives the loan. This means that real estate owners who may not be able to obtain conventional loans due to issues with their credit history or income verification can still access these loans.
Faster Approval and Funding: One of the key benefits of hard money loans is the speed with which they can be processed and funded. The process of getting approved and getting the money is much faster than with a standard lender. It usually takes only days or weeks, instead of months. For buyers who need to act quickly on opportunities, this flexibility is essential.
Purpose: Hard money loans are meant to be used for investing in real estate. They are often used for fix-and-flip deals, fix-and-hold plans, fix-and-rent situations, buying land to build on, and financing new constructions.
How Hard Money Loans Work
In this process, an investor typically finds a property, applies for a hard money loan, and the lender evaluates the property's worth and the borrower's promise. Once accepted, the investor can quickly secure the funds needed to execute their real estate plan. Most of the time, the loan is paid back when the property is sold or refinanced.
Hard Money vs. Traditional Loans:
Here's a quick comparison highlighting the key differences:
Feature | Hard Money Loans | Traditional Loans |
Underwriting | Primarily asset-focused (property ARV) | Primarily borrower credit/income |
Speed | Fast (days to weeks) | Slow (weeks to months) |
Loan Term | Short (6 months to 3 years) | Long (15 to 30 years) |
Interest Rates | Generally, higher interest rates | Generally lower interest rates |
Flexibility | More flexible terms and requirements | More rigid bank requirements |
Lender Type | Private investors/private lenders | Banks/credit unions/traditional FIs |
Decoding Hard Money Loan Interest Rates: Key Influencing Factors
The interest rates on hard money loans vary. They change over time based on several factors that a lender carefully considers before offering terms. Anyone who wants to maximize their credit for real estate investments needs to understand these factors.
Loan-to-Value (LTV) Ratio and Loan Amount
The Loan-to-Value (LTV) number is significant. To find it, divide the loan amount by the property's After-Repair Value (ARV), a term commonly used in hard money banking. Hard money loan rates are usually lower when the LTV is smaller. This is because a lower LTV means the money lender is taking on less risk, as the collateral gives them greater ownership. On the other hand, interest rates will usually be higher for loans with higher LTVs because there is less wealth to protect the lender. As experienced underwriters, we at Commercial Lending USA carefully look at the LTV ratio to give you the best money loan rates for your rental property.
Property Type and Project Risk
The type of property being used as collateral has a significant impact on its perceived riskiness, which in turn affects the interest rate. The risk level for a simple fix-and-flip job on a single-family residential investment property is likely to differ from that of a complex ground-up construction loan for a commercial property, an assisted living facility, or a hotel investment property. Interest rates will usually be higher on projects that lenders consider riskier, such as those that are more specialized, more challenging to build, or operate in a volatile market. This is done to protect the lenders from losing money.
Loan Term and Exit Strategy
It is a fact that hard money loans are always short-term loans. Because of this, lenders need to recoup their investment and make a profit quickly, which is one reason why interest rates are often higher than for long-term standard loans. The length of the loan has a complex effect on the rate. A slightly shorter term may require a higher rate, but the total interest paid over the life of the loan may be less. On the other hand, a longer-term might have a cheaper annual rate but cost more in interest over time. Significantly, the lender's trust and, by extension, the interest rates on hard money loans are influenced by the clarity and realism of your exit strategy. This includes whether you plan to sell the investment property for a profit or refinance with a traditional lender. A clear and attainable exit strategy means less risk.
Borrower Experience and Financial Stability
Although hard money loans are primarily based on assets, the borrower's background is not entirely unimportant. Suppose you are an experienced real estate investor with a proven track record of making sound investments and a strong credit score. In that case, you may be eligible for more favorable terms. Based on their past performance, they have a lower chance of defaulting and a higher chance of completing the job successfully. Commercial Lending USA has been an insurer for 30 years, so they look at more than just the property. They also look at the real estate investor's plan and experience.
Market Conditions and Lender Specifics
The interest rates on hard money loans are also influenced by the general economy and prevailing interest rates in the financial world. Hard money rates can increase if the loan market becomes tighter or if benchmark interest rates rise. Additionally, each private investor and money lender in our network has its own risk tolerance, funding costs, and pricing structure. We offer a wide range of choices because we have a diverse network of private lenders and investors. By matching your project with the lender whose requirements are most similar to yours, we can often secure you better loan rates.
The Full Cost Picture: Fees Associated with Hard Money Loans
Real estate buyers should be aware that the interest rate on a hard money loan is only one part of the total cost when evaluating it. If you only consider the interest rate, you might get a limited and inaccurate picture of how much the loan costs. Different fees add up to a big chunk of the overall cost.
Origination Fees (Points)
One of the most significant and upfront costs associated with hard money loans is the origination fee, also known as "points." Points are equal to 1% of the total loan amount. The origination fee that hard money lenders charge can range from 1% to 5% (or even higher, depending on the risk) of the loan amount. These fees compensate the lender for assuming a significant amount of risk and handling the associated paperwork required to process the loan. It's essential to note that these upfront costs have a direct impact on the annual Percentage Rate (APR). The APR provides a more accurate representation of the loan's actual yearly cost by including all applicable fees and interest.
Underwriting and Processing Fees
Borrowers will also be required to pay underwriting and processing fees, in addition to the origination fee. These cover the lender's due diligence, which includes a careful review of the property and the borrower's plan, the creation of legal documents, and the general administrative costs associated with handling the loan application. At Commercial Lending USA, we believe in being transparent and honest about all your hard money loan fees, so you have a clear understanding from the start.
Appraisal and Inspection Costs
Even though hard money loans are based on assets, the property that is being used as collateral almost always needs to be evaluated by a third party. This assessment confirms the property's worth, particularly its After-Repair Value (ARV) for projects that involve renovating homes. Additionally, various inspections (such as structural, environmental, and building progress) may be required to mitigate the lender's risk, particularly for construction loans or fix-and-flip deals. Most of the time, the customer pays for these services.
Closing Costs and Escrow Fees
Closing costs are a standard part of any real estate transaction, and hard money loans are no exception. Some of these include title insurance, escrow fees, legal fees, recording fees, and other fees that facilitate the legal transfer of funds and the establishment of a lien. These are everyday considerations that an investor should take into account when creating a budget.
Prepayment Penalties (Important Consideration)
Prepayment fees are something to think about, especially when it comes to short-term loans. Some hard money lenders charge these fees if the loan is paid back early. This is typically done to ensure the lender receives at least some interest on their investment. It's essential to clarify this point right away, even though not all hard money loans have prepayment fees. At Commercial Lending USA, we help you find loans that align with your real estate investment strategy and ensure you understand the implications of your exit plan. These loans may or may not have prepayment fees.
Your Guide to Calculating Hard Money Loan Interest Rates
For accurate financial planning and sound real estate investments, you need to know how to figure out how much a hard money loan costs. It's more than just looking at the interest rate that was mentioned.
Step 1: Determine the Principal Loan Amount
The principal amount of the loan is what you need to figure out. The lender's Loan-to-Value (LTV) ratio is used to figure out this number. For investment homes, the LTV ratio is usually based on the property's After-Repair Value (ARV). In this case, if a lender gives an 80% LTV on a property worth $150,000, the amount of the primary loan would be $120,000.
Step 2: Understand the Interest Rate Quoted
Pay close attention to whether the interest rate given is for a year or a month. Although it's usually presented as an annual number, ensure it's clearly stated. Many hard money loans only require interest payments. This means that during the loan term, your only monthly payment will be the interest added to the principal amount. At the end of the term, you will repay the principal amount in full.
Step 3: Factor in Points and Fees
Keep in mind that the costs you pay upfront, like origination points and other fees (like filing and underwriting), are either taken out of the total loan amount or paid at closing. You need to consider these factors to understand the cost fully. For example, if you obtain a $100,000 loan with two points, you will either receive a $2,000 upfront payment or have that amount deducted from the loan. It costs you more upfront, so the capital you receive is worth more.
Step 4: Consider the Loan Term
The total amount of interest paid depends significantly on the loan term. It doesn't matter how low the monthly interest rate seems; a longer term will result in more interest in the long run. On the other hand, a shorter term will cost less in interest over time, even if it means a slightly higher monthly payment.
Example Calculation (Simplified)
Let's illustrate with a straightforward example:
Principal Loan Amount: $100,000
Annual Interest Rate: 10%
Loan Term: 12 months (interest-only payments)
Origination Points: 2 ($2,000)
Monthly Interest-Only Payment:
($100,000×0.10)/12=$833.33
Total Interest Paid Over 12 Months:
$833.33×12=$10,000
Total Cost Over 12 Months (excluding other minor fees):
$10,000 (Interest)+$2,000 (Points)=$12,000
As part of our financial consulting services, we can help you carefully figure out how much your real estate purchases might cost and how much money they will make, so you have a clear financial road map.
Strategic Uses for Hard Money Loans in Real Estate Investments
Hard money loans may be more expensive, but they can be invaluable for individuals who want to purchase a house in some instances. The pros of these loans outweigh the cons.
Speed is Key: Hard money loans are often the fastest way to get the money you need. This is particularly important when there is a lot of competition, such as when you need to buy a foreclosed home quickly or take advantage of a deal immediately and cannot wait for a standard loan approval, which can take a considerable amount of time.
Value-Add Projects: These loans are ideal for cases where major repairs or improvements will significantly increase the property's value, such as in fix-and-flip deals, new building loans, or fix-and-hold strategies. They are great for these jobs because they focus on AUV (After-Repair Value).
Non-Traditional Borrowers: Hard money loans are an option for property owners who may struggle to obtain conventional loans due to poor credit, insufficient income verification, or a preference for streamlined processing. Private lenders often offer options such as no-doc, lite-doc, or stated-income loans.
Diverse Property Types: At Commercial Lending USA, we have extensive knowledge of various property types. This makes hard money a flexible option for spending in multiple areas. This includes but isn't limited to, commercial properties, residential investment properties, self-storage facilities, mixed-use buildings, properties for assisted living and senior housing, multifamily investment properties, rental investment properties, commercial spaces, hotel and motel investments, and restaurant properties.
Bridge Financing: Hard money loans excel as bridge loans, providing interim financing while investors stabilize a property, improve its cash flow, or prepare for long-term refinancing with a traditional lender. They bridge the gap between opportunity and conventional financing availability.
Securing the Best Hard Money Loan Rates for Your Real Estate Investments
Hard money loans have higher interest rates than other types of loans, but if you plan and have a good credit history, you can get much better terms.
Strong Deal Presentation: A carefully thought-out project plan is essential. This includes a concise and clear business plan. This comprehensive budget outlines all costs and an After-Repair Value (ARV) based on actual sales data. A convincing presentation based on a thorough study demonstrates that you are a professional and reduces the risk that the money lender perceives.
Higher Down Payment: Offering a larger down payment is one of the best ways to secure better hard money loan rates. A lower Loan-to-Value (LTV) number means the lender is taking on less risk, which makes them more likely to offer reasonable rates and terms.
Clear Exit Strategy: Lenders want to know that their money will be returned. It is essential to have a clear and believable exit plan. To achieve this, the investment property may need to be sold or refinanced with a long-term loan type, such as a DSCR loan, a USDA B&I loan, an SBA loan, an FHA commercial property investment loan, or a standard term loan. Lenders will trust you more if you can demonstrate a clear repayment plan.
Lender Relationships: You can't say enough good things about working with experienced financial experts like Commercial Lending USA. We have been in the insurance industry for 30 years and have an extensive network of over 200 private lenders and investors. This allows us to match your project with lenders whose criteria and risk tolerances are most similar, which often results in better rates and terms.
Negotiation: Rates on hard money loans aren't as flexible as rates on standard loans, but some things can be worked out. This could be the number of points charged, the length of the loan, or even specific fines for paying it off early. You can gain a competitive advantage in these talks if you have a strong deal, a well-defined exit plan, and the support of experienced consultants.
Partnering with Commercial Lending USA: Your Expert Hard Money Loan Resource
To buy a house, you need to find the right business partner. For getting a hard money loan, Commercial Lending USA is the best place to go. After 30 years of experience in insurance, we know what to do. We can create custom financial solutions that genuinely benefit our clients, making their investment journey easier and more rewarding, as we possess extensive knowledge about real estate investments and risk evaluation.
Our most significant strength is our extensive network of over 200 private lenders and investors who are also owners. Because we have numerous connections, we can carefully connect you with the best money provider for your apartment project. You can be assured that you will secure favorable terms and interest rates on a hard money loan by doing so. We help people get loans, but we do more than that. We also offer comprehensive financial coaching, which includes strategic advice that is especially useful for individuals new to the real estate market, which moves quickly.
We are pleased to offer a diverse selection of loans, including construction loans, term loans, stated-income loans, no-doc loans, lite-doc loans, USDA B&I loans, SBA loans, FHA commercial property investment loans, bridge loans, hard money loans, DSCR loans, and many more. As part of our dealer programs, we also help build strong relationships in the business by providing both new and experienced agents with opportunities to refer other agents. Because we put the client first, you are not just a borrower; you are a real partner in our goals for your real estate business.
Conclusion
It's not just helpful to understand the ins and outs of hard money loan interest rates and costs; it's necessary for the success of your real estate purchases. Investors can confidently and accurately navigate the market if they understand the factors that affect it, determine the actual costs, and utilize these powerful financial tools in a planned manner.
Are you ready to look into real estate investment options and learn how hard money loans can help your project? Get in touch with Commercial Lending USA right away for expert financial advice and access to low-cost loan rates. We want to help real estate owners achieve their significant goals by providing them with the right financing options, even when interest rates are high.
FAQs
Can I get a hard money loan if I have bad credit?
Yes, even individuals with poor credit can obtain hard money loans. In contrast to traditional lenders, who place a significant emphasis on income and credit scores, hard money lenders primarily focus on the property's value and prospects. Your credit history is taken into account, but it's not the only thing that matters.
Are hard money loans always "interest-only" payments?
It's not always the case, but for many hard money loans, the only payment made during the loan term is interest. This type of arrangement is common because it lowers monthly payments, allowing investors to save money for project costs, such as renovations. However, some lenders may offer loans with payments that are spread out over time, where a part of the capital is paid off every month. How you pay back the loan will depend on the lender and the terms you agree to.
What happens if I am unable to repay my hard money loan by the maturity date?
It is essential to contact your lender immediately if you are unable to repay the loan by the due date. Many hard money lenders will allow you to stretch your loan, but it usually comes at an additional cost. But let's say you don't get an extension or can't meet the new terms. If that happens, the loan will not be repaid, and the lender can initiate foreclosure processes to recover their investment. To avoid this, it is essential to have a clear exit plan from the outset.
Can hard money loans be used for owner-occupied properties?
Hard money loans are typically not made for homes where the borrower resides. They are primarily used to invest in real estate, such as fix-and-flip homes, rental properties, or commercial developments. Lenders usually prefer properties that the borrower doesn't hold due to regulatory and risk factors.
How quickly can I typically expect a hard money loan to be funded after approval?
One significant benefit of hard money loans is that they can be obtained quickly and easily. Traditional loans can take weeks or even months to be finalized and closed. Hard money loans, on the other hand, can often be approved and funded in just a few days or weeks, depending on the lender's speed and the complexity of the deal. This quick turnaround is ideal for investment opportunities that require rapid action.
Sam Haq, CEO
Commercial Lending USA
www.commerciallendingusa.com
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