Hard money loans may seem intimidating, but they are very similar to conventional loans that you might get through a traditional lending institution. The specifics may change, but they both have a structure and a set of defining characteristics that ensure the lender and borrower are on the same page. These are called 'loan terms'. As real estate investors, you obviously know this, but it can be helpful to revisit the basics from time to time in order to put yourself in the best possible position to succeed.
Whether you're looking to use hard money, or a more traditional loan you will have to consider the following basic terms before signing on the dotted line:
Loan Term: The length of the loan, or the time it will take to be completely paid off if the borrower makes payments according to their initial schedule. Note: The naming of a 'loan's term' and the 'terms of a loan' is coincidental.
Due Date: A specific date when the loan needs to be repaid in full.
Principal: The total amount of the loan. The amount you will pay back is the principal plus interest.
Interest Rate: The amount a lender charges the borrower as a percentage of the principal. The interest rate is communicated on an annual basis but accrues over shorter periods of time.
Origination Fees: The upfront fee charged by a lender to process a new loan application. This covers the cost of the time and effort the lending team puts into origination.
These are the types of terms that can be found in just about any loan, whether you are borrowing for a small business, car payment, home purchase, or investment property. No matter how you intend to use your loan, it's important that the terms match your objectives. If you're investing in real estate you need to be certain that the costs associated with your financing allow room for a profitable outcome.
What are the Typical Terms for a Hard Money Loan?
Hard money loans are characterized by their relatively high-interest rates and short repayment periods. Most often they originate from private funding sources and are used to fund investments, particularly in real estate.
At The Hard Money Co. our terms look like this:
Loan Term: 6 Months with an opportunity to refinance and extend.
Interest Rate: 15% annualized and fixed interest rate
Payment Schedule: Monthly, interest-only payments with a balloon payment on the due date
Origination Fees: 5% of the principal amount (or a minimum of $2,500)
These terms look expensive relative to other loans you may use daily. While it's true that our interest rates are higher, the value we bring comes in the form of real estate expertise, opportunity, and the power of leverage. Hard money loans are more expensive because distressed assets are inherently risky and traditional institutions won't lend on investment properties. For many borrowers, there isn't another way to access the wealth-generating potential of real estate investing.
The Hard Money Co. provides this opportunity.
What are the Typical Terms for Soft Money?
Soft money is a term used to describe more conventional loan products. These are the kinds of loans that you might get for your mortgage from a big bank. Soft money loans have longer terms that can become increasingly expensive as your interest rate compounds year over year. They also have interest rates that reflect the market more closely. Because there are so many options for soft money loans, most consumers shop the rate to find the one that is the cheapest.
Soft money loans also have trouble differentiating themselves in other ways, as the underwriting process is heavily bureaucratized. This can be a good thing when market conditions are right and the federal interest rates are low. When they rise, though, consumers are left paying rates up to 7-8% all without the value-adds of hard money lending and the real estate investment expertise they bring to the table.
These factors, combined with a volatile real estate market, have made hard money loans an increasingly inexpensive and attractive option for investors across the country.
Are there other loan terms?
In addition to the core terms that are associated with any loans, there are also an unlimited number of other considerations that can be written into a lending contract that are also considered 'terms'. For instance, The Hard Money Co. requires that all borrowers form a Limited Liability Corporation (LLC) before we close. Another requirement is that the investor use the proceeds of the loan for an investment property and not a primary residence.
Other terms include time to close, Loan-to-Value ratio, insurance or collateral requirements, payment schedules, and many more. For some lenders, these terms may be negotiable while others have theirs set in stone. The more knowledgeable you are about the specifics, the better position you will be in to potentially negotiate a superior deal for yourself when it comes time to sign.
How Do I Know if the Loan Terms Work for Me?
The Hard Money Co. values transparency for all of our borrowers. We have many successful borrowers who choose to use other funding sources on deals where a hard money loan just doesn't make sense. We would encourage anyone with a potential deal to make use of our Hard Money Loan Calculator. This useful tool breaks down the exact amount you can expect to pay for one of our loans, and can help inform whether you should invest or not.
Once you've used the loan calculator, either submit an application or reach out to us. We'd be happy to discuss the specifics of your project and help you decide whether the terms of a hard money loan fit within your goals of becoming a real estate investor.