Hard Money Loan Interest Rates: A Closer Look

What do you think when you hear “hard money loan?” If you think of successful business deals leading to cash profits, then you wouldn’t be far off. While this loan is an excellent financing deal for many, it’s for a specific purpose and borrower.

So, what are hard money loans? And how do hard money loans work?

This guide provides all the information you need, from eligibility requirements to the hard money loan interest rate and more.

What Is a Hard Money Loan?

Hard money loans are short-term loans that require the borrower to secure them with an asset, such as a home, as collateral. Thus, the collateral must be sufficient to cover the appraised value of the property.

Also known as bridge loans, hard money loans often help home buyers purchase one property while preparing to sell another, but there are other uses.

Importantly, hard money loans are not available from traditional lenders. They are instead available from private lenders or individual investors.

However, just because these loans don’t come from a traditional lender doesn’t make them bad, as the name implies. Title XXXIII, Chapter 494 defines a mortgage lender as “a person making a mortgage loan or servicing a mortgage loan for others, or, for compensation or gain, directly or indirectly, selling or offering to sell a mortgage loan to a non-institutional investor.”

This law makes private money loans legal and a legitimate source of funds.

How Do Hard Money Loans Work?

Hard money loans are different from traditional loans in several ways. First, they offer fast funding. The approval process takes a few days (or weeks) at best, compared to a month or two for traditional loans.

These loans also allow borrowers to make interest-only monthly payments. You pay off the interest in a specified amount of time, then pay off the loan balance at the end of the loan period.

Further, the repayment period for a hard money loan is typically shorter, often one year, with some being as short as six months. With a traditional mortgage, you pay toward the principal loan from the beginning, and the terms are 15 to 30 years.

Additionally, if you pay off a conventional mortgage early, you would likely face a prepayment penalty. Hard money loans usually don’t have this penalty.

While both loans can be used for various property types (single-family homes, condos, and townhomes), hard money loans can also be used for multifamily properties.

Finally, both loans have closing costs and an origination fee. However, the fees may be higher with a hard money loan.

What Are Hard Money Loans Used For?

Consider this type of loan over traditional loans for several other reasons. Read about them below.

Flipping a House

Real estate investors often purchase fixer-upper homes to remodel and sell for a profit. Since these real estate projects have a quick turnaround, investors prefer a faster financing option, like hard money lending.

Additionally, these fix-and-flip loans are available for a property’s purchase price and renovation costs, usually up to 75% of the property’s after-repair value (ARV). Yet, if you purchase a property with the idea of demolishing it and building a custom home, you may consider getting a construction loan.

If you want to undertake a home renovation project, you can get a hard money loan, too; you could also consider a home equity line of credit (HELOC).

Purchasing Investment Property

If you want to invest in a rental property but can’t get traditional financing, a hard money loan can help. You can secure the funding you need for the real estate investment and use the profits to pay off the loan.

Purchasing Commercial Property

A hard money loan can also help you purchase commercial real estate. This is particularly useful when the amount you need for the property exceeds what you can get from a traditional loan.

What to Expect With Hard Money Loan Interest Rates

Because hard money loans are riskier, they have higher interest rates than traditional loans. But don’t let high interest rates deter you from considering this financing option, as it may be precisely what you need. Sometimes, other terms are more important than having a lower interest rate.

For example, if you have a looming foreclosure, a hard money loan may be your best option.

You can also refinance hard money loans. Many borrowers will use a cash-out refinance to refinance a hard money loan when it is due soon or to get a lower interest rate.

What Affects Your Hard Money Loan Interest Rate?

Like traditional banks, hard money lenders will assess your risk of default (creditworthiness) before giving you a loan. Here’s what you need to know before beginning the loan application process.

Your Investment

The loan-to-value (LTV) ratio for a hard money loan is usually 75% and 80%. This means you need to have 20-25% of the investment cost upfront, and the loan amount will cover the rest.

However, the more you put down, the better interest rate you’ll get.

Your Credit History

Most hard money lenders will do a credit check to review the borrower’s credit history, but the underwriting process is less strict than with traditional loans.

This means your credit score doesn’t need to be great to get a hard money loan. The property’s value is more important.

Your Experience Investing in Real Estate

Getting a hard money loan may be more challenging if you’re a first-time home flipper. Lenders view investors with more experience as less risky because they have a portfolio of successful projects and a track record of repaying their loans.

How Do You Get Approved for a Hard Money Loan?

The approval process for a hard money loan doesn’t require nearly as much paperwork as a traditional mortgage. The lender will consider the following:

• Collateral
• Credit score
• Down payment
• Income
• Property’s value and rental income amount

Submit an application for a hard money loan with the required documents, and you will receive approval within a few days!

Hard Money Loans With Associates Home Loan

While the hard money loan interest rate may be higher than the interest rate for traditional bank loans, hard money loans are still excellent for several situations.

If you’re ready to get funding, apply now for a hard money loan from Associates Home Loan of Florida. We’re an NMLS-licensed loan provider with a team that will ensure you get a loan solution tailored specifically to your needs.