Hard money loans have become increasingly popular with real estate investors because they can facilitate highly profitable property flips without the usual waiting time, administrative hassle and possible rejection that one could face when approaching a normal bank.
Unlike a traditional home mortgage, hard money lenders typically only charge interest on a monthly basis, which means you don’t actually pay any money toward the principal loan amount at each monthly payment cycle. However, you will have to pay back the full principal amount at the end of the loan’s life cycle.
To further illustrate how hard money loan repayments work, we will now:
Hard Money Loan Monthly Repayment Example
To further illustrate how hard money monthly repayments work, let’s run through an example which compares a traditional mortgage repayment versus a hard money loan monthly repayment.
Please note – For the sake of simplicity, we are only factoring in the principal and interest portions of the loan repayment in the example below.
|Standard Home Loan||Hard Money Loan|
|Loan Amount: $200,000||Loan Amount: $200,000|
|Interest Rate: 5%||Interest Rate: 10%|
|Loan Terms (Lifespan): 360 Months||Loan Terms (Lifespan): 24 Months|
|Holding Time: 360 Months||Holding Time: 12 Months|
|Monthly Repayment: $1,073.00||Monthly Repayment: $1,666.67|
|Total Interest Paid: $186,815.32||Total Interest Paid: $20,000.04|
At this point it’s worth pointing out some key observations:
Although the hard money interest rate is higher, the total interest paid over the course of the loan’s lifespan is typically lower than a normal consumer mortgage. There are two main reasons for this:
Reason 1 – The lifespan of the hard money loan is significantly shorter than the lifespan of a normal home loan. In other words, instead of paying interest on the loan for 30 years, you are only paying interest for the number of months that you hold (own) the property. In most cases, property flippers will sell the property before the loan term officially expires. The sooner you sell the property, the less interest you pay, meaning more total profit for the investor.
Reason 2 – You only pay the interest portion of the loan on a monthly basis (i.e. you don’t make a dent in the principal amount owed).
With a standard home loan, your monthly repayment covers the interest on the loan and a portion of the payment goes toward the principal. With a hard money loan, you literally don’t even touch the principal amount. The expectation of the loan provider and the property investor is that the principal amount will be paid back to the hard money lender when the house is sold.
Additional Costs That You Can Expect with a Hard Money Loan
Category 1 - Financing Costs
It is common for hard money loans to cover up to 90% of the property purchase price. It is also common for the rehab (renovation) costs to be covered by the loan as well.
Interest Rate (%)
The interest rates for hard money loans tend to start at around 9% and upwards. Your credit score and investment experience can influence the interest rate offered.
Total Interest Paid
To calculate the total interest paid on a hard money loan, you essentially just multiply the monthly repayment amount, by the number of months that you hold the property for. So if your repayment is $1500, and you hold the property for 12 months, the total interest paid would be $18,000.
Category 2 - Buying Costs
This is an Insurance policy to insure clear and marketable title of the property. The property title insurance cost can change based on area, type of policy, and the underwriter costs needed to search for the title history.
Attorney and closing costs
These are fees paid to recording, attorney and other 3rd parties for standard real estate closings.