Hard money loans are a great way to get the necessary financing for real estate investments. If you don’t have a large amount of cash available or you don’t want to tie up 100% of your liquid funds, hard money loans provide an alternative method of funding that traditional loans typically won’t provide.
Everyone wants to know, though, what are the interest rates? Aren’t interest rates on hard money loans high?
That’s a myth that has been perpetuated in recent years. Is there interest? Of course, every borrower pays interest, but hard money loans are short-term loans that provide the immediate financing you need to close on an investment property, so the interest is often worth it and again, short-term.
The Average Rates
Today, hard money loan rates range from 7 ½ to 15 percent. They also often have points or fees that offset the administrative costs. One point equals one percent of the loan amount. Hard money lenders charge 3 to 5 percent on most loans.
While it sounds high, remember what these loans do – they help you grow your real estate investment portfolio. Without the hard money loan, you either need all cash or to qualify for traditional financing, which is often much harder than hard money loans.
What Affects Your Hard Money Loans?
Your Own Investment
You’ll likely be able to borrow up to 75 percent of the home’s purchase price or after-repair value (depending on the lender). This means you need your own investment and the more money you have the higher your chances of approval become.
The more money you put down, the less risk the lender takes on. Take two borrowers for example – one borrow with a 50 percent deposit and another with a 25 percent deposit – they are both good borrowers, but the borrower with a 50 percent down payment poses a smaller risk of defaulting and may get better interest rates as a result.
Experience As A Real Estate Investor
Since you’re borrowing money to buy a home you aren’t going to live in, lenders take a big risk by granting you the funds. If you run into financial difficulty, your investment property payments are likely the first thing to go. You aren’t going to risk losing the house you live in, after all.
If you have experience as a real estate investor, it bodes well for lenders. They often give the investor’s background in real estate more stake than your credit history. If you’re looking to fix and flip, for example, lenders think of investors with experience as less of a risk than those doing it for the first time.
A Strong Credit History
Of course, any lender (hard money or otherwise) cares about your credit history and personal finance history. They’ll take it into consideration whether you have a long history in investment properties or not. They need to know you’re financially capable of handling the addition of another loan on top of your own mortgage and/or other financial obligations.
You don’t need ‘perfect credit’ but like any other loan, the higher your credit score is, the more likely you are to get a better interest rate. If you want to be on the lower end of the 7.5 percent rates rather than the 15 percent rates, work on your credit before you apply.
If you want to invest in real estate, find a way to make yourself look as attractive as possible to hard money lenders. Rumor has it that they don’t care about your credit or history – but they do and it will have a big impact on your lending suitability. Lenders want to see that you’re financially responsible, have real estate experience, and are invested in the process.
The more favorable factors you can bring to the table, the lower the interest rate you’ll get. Even if you do wind up with a 15 percent interest rate, it’s not forever. Think about how long you’ll keep the property and figure the interest in as a part of your carrying costs. When you work it into the calculations, suddenly the interest charges don’t seem so bad and become a part of doing business.