How Do Hard Money Loan Monthly Repayments Work?

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:

  • Provide a simple hard money loan repayment example
  • Uncover all the additional costs that you can expect when using a hard money loan
  • Answer a few frequently asked questions related to hard money repayments

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

There are 4 broad cost categories that typically come into play when making use of a hard money loan. You can also see how all these costs come together with our Hard Money Loan Calculator.

Category 1 - Financing Costs

Loan Amount

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.

Hard Money Origination Fee

The points are a fee charged by the hard money loan provider. It is usually between 2-5% of the loan amount.

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

Title Insurance

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.

Category 3 - Holding Costs

Property Taxes

You will be liable for property taxes once you take ownership of the property. When assessing a fix and flip, it is typical to factor in the yearly cost of property tax.

Homeowners Association (HOA) Fees

HOA Fees are only applicable to certain types of properties (usually apartments and condos)

Property Insurance

The value of the home will ultimately determine the monthly property insurance costs.

Utility Costs

HOA Fees are only applicable to certain types of properties (usually apartments and condos)

Property Insurance

The value of the home will ultimately determine the monthly property insurance costs.

Homeowners Association (HOA) Fees

HOA Fees are only applicable to certain types of properties (usually apartments and condos)

Hard Money Monthly Repayment

This is based on loan amount and the amount offered. For instance, if you were offered a $200,000 loan, with a 10% interest rate, the hard money monthly repayment would be around $1666.

Category 4 - Selling Costs

Realtor Fees

Realtor Commissions as agreed in Purchase and Sale Agreement and extra fees for transaction processing. It is common for realtor fees to hover between 3 and 5 percent of the property’s selling price.

Transfer & Conveyance Fees

For the transfer of land charged by the county from seller to buyer. Typically a % of the land value based on county assessor valuation. It’s imperative you research the correct percentage for your area as it can be vastly different.

Attorney and Closing Costs

These are fees paid to recording, attorney and other 3rd parties for standard real estate closings.

Selling Recording Fees

Fees taken from the HUD-1. County recording fees charged by escrow company

Home Warranty

Offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowners insurance; overage extends over a specific time period and does not cover the home’s structure.

Staging & Marketing Costs

Staging a property can improve your chances of selling it quickly, while marketing the property online or in newspapers will also result in a cost that you should factor into the deal.

Frequently Asked Questions (FAQ)

What happens if you default on a hard money loan?

If you can’t make your payment, most lenders have some flexibility and forbearance programs (especially in times of crisis). However, if you go into default, you may be looking at a court mandated foreclosure, where the house will be reclaimed by the loan provider and then sold as quickly as possible. Naturally this could have a negative impact on your credit score, and it is something you want to avoid if possible. There may also be other options available, such as deed in lieu.

What happens if you default on a hard money loan?

The interest on a hard money loan is calculated based on the interest rate, and the length of the loan. As mentioned previously, you only pay the interest portion of the loan. The principal loan amount is paid back to the hard money lender when the property is sold.

What happens if you don’t sell the house before your hard money loan expires?

Most lenders can offer an extension, however, if one is not available, the loan would need to be paid back prior to the term expiration, otherwise, the loan will go into a default.

Can you extend a hard money loan?

Typically, yes, most lenders have an extension option, though there may be additional costs involved.

Resources Used In This Guide

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