Hard money loans (also known as commercial and residential hard money loans) are a type of loan that allows investors to obtain funds to purchase an investment property. These loans are made in the form of a line of credit that allows the lender to advance funds to the investor for a specific purpose.
In this article, we’ll explore the benefits of hard money loans, types of hard money loans, costs associated with hard money loans, and how to evaluate your choice of the lender(s) for hard money loans.
Why Hard Money Lending Works
Hard money loans are a great way for investors to obtain funds for their real estate purchases. The money is not coming from a bank or traditional lender. Instead, the lender is providing funding against the value of an asset. This makes the borrower eligible for significantly higher interest rates and more lenient terms than a bank would offer.
The Benefits of Hard Money Loans
The primary benefit of hard money loans is that they are a viable alternative to traditional bank financing. Hard money lenders are willing to fund deals that a bank would not finance. This includes deals that involve:
- Fix and flip properties
- Resulting in short-term cash flow problems
- Investment properties located in areas that banks do not want to lend in
Hard money loans also provide access to capital that traditional banks will not provide. This is particularly helpful when you need a large amount of capital to purchase an investment property.
Types of Hard Money Loans
There are various types of hard money loans. In addition to traditional hard money loans, you can have a hard money loan from a private lender or a hard money lender. Hard money lenders are companies that specialize in providing hard money loans. They are often referred to as “private money lenders.” Private money lenders provide funding against the value of an asset or the cash flow of an investment property. They are not traditional lenders who hold your collateral and then sell it on the market to get their funding.
Equity loans allow you to borrow against your investment property’s equity. This means that you can use the equity that you have built up in your investment property as collateral for the loan. This is different from traditional hard money loans because you will not be borrowing against your property’s value. Instead, you will be borrowing against your property’s equity.
- Private Money Lenders (Private Hard Money Loans)
- Equity Loan (Equity Hard Money Loans)
What Are The Costs for a Commercial or Residential Hard Money Loan?
Hard money loans provide access to funding at a much lower cost than traditional bank financing. You can expect to pay between 10% and 30% less than you would pay for a traditional bank loan. The cost is lower as compared to bank financing because of the lack of collateral, which allows lenders to charge lower rates and fees than traditional banks can offer.
The cost for a hard money loan is divided into two categories: interest rate fees and origination fees. Here’s what you should expect to pay for each category:
- Interest Rate Fees: The interest rate fees on hard money loans are typically at a lower rate than what you would pay with a traditional bank loan. This is because the lender does not have to hold your collateral and is able to charge higher interest rates than a traditional bank could offer. As such, the interest rate fees on hard money loans are typically between 10% and 30% less than what you would pay with a traditional bank loan.
- Origination Fees: The origination fee is an upfront fee that you pay when you obtain your hard money loan from a private lender or hard money lender. You should expect to pay between 1% and 5% of the total loan amount as an origination fee when you obtain your hard money loan.
Hard money loans can be an attractive alternative to traditional bank financing when it comes to obtaining capital for real estate investments. They allow borrowers access to funding at much lower interest rates and they can be used when conventional banks won’t finance certain deals due to factors such as location or short-term cash flow problems. There are two types of hard money loans: private loans and equity loans. Each type has its own advantages and disadvantages that should be carefully considered before choosing which type is right for your situation.