A hard money loan is a type of asset-based financing secured by a property – commonly used in real estate investing. The lenders are individuals or companies that see value in the risky venture. Typically, the borrower posts the physical property as collateral. But as with other types of loans, this type of financing has its pros and cons. To determine whether a hard money loan is suitable for you or not, you should know how it works.
Terms of hard money loans
Hard money loans should be repaid within a short period (anywhere from a few months to a few years). This makes them ideal for investors looking to quickly renovate their property for a profit. Riverside Hard Money Lender offer loans that range from one day to 60 months. And they include a balloon payment at the end of the term. This means that the principal is due at the end of the loan term.
If for some reason you can’t pay the loan in full, you can refinance it. But if you can’t repay the loan, the lender can take ownership of the property.
Interest rates
Unlike traditional loans, hard money loans feature high-interest rates (8-15% p.a). This is because real estate risks are high, and most of the time, no vetting is required. Since there’s no examination of credit score, such loans are accessible to those with poor credit. Riverside hard money lender offers loans at an interest rate of 8%. And they provide financing for different types of properties – single-family, multi-family residence, commercial, and special purpose property.
Hard money loan points
The points refer to the origination fee a lender charges. It’s in a combination of administrative costs, fees, loan initiation, and more. Since the points are calculated in percentage points, they can range from 2-10%.
Down payment
As with any other type of mortgage, the borrower is supposed to make a down payment (generally 10% of property value). Let’s say you want to buy a property worth $100,000. The lender can only offer 90% financing. If you borrow the money to do minor repairs, the lender will consider the after repair value (ARV).
However, not all hard money lenders will ask for a down payment. But you expect the percentage of the purchase price to be high.
In hard money loans, your property works as the collateral. If you cannot make the monthly payments, you risk losing your property to the lender. One benefit of choosing hard money lenders is that they are fast, so you don’t have to go through the arduous loan application process common in conventional mortgage loans.
