Are you planning to borrow money such as a hard money loan? You might be wondering what is its interest rate. You divert toward this loan because it’s not a traditional loan. Its unique characteristics make it an attractive loan choice. However, you are always interested to know what interest is applied to a hard money loan. Because interest defines your repayment. So, if you have questions regarding the interest rate of a hard money loan. It’s time to unlock the complete details below.
Understanding Hard Money Loans
Before I start talking about interest rates, it’s always a good idea to look into hard money loans first to get a complete understanding. These loans are issued by private investors and companies. You won’t get them from traditional banks or credit unions. It is quite an attractive loan for real estate investors who are interested in obtaining quick money but are unable to get it from traditional lenders. It’s because they may not meet the strict criteria of bank loan requirements.
It’s always a good idea to understand that hard money loans are short-term. It means you need to pay them within a few months to a few years. This short-term loan option is quite a valuable tool for real estate investors as they can do quick financing and house flipping by getting these loans. Real estate investors who want to renovate a home often get these loans.
Interest Rates on Hard Money Loans
When you opt for a conventional route of financing such as mortgages or personal loans, somehow interest rate is stable and predictable. But it’s not the case with hard money interest rates. Let’s find out more about it:
Higher Interest Rates
You will pay a higher interest rate on hard money loans compared to traditional loans. Now you might be wondering, if the rate is that high why one should consider applying for these loans? Here is why real estate investors get hard money loans regardless of their high-interest rates:
The first reason that makes it a delightful financing choice for real estate investment is the speed of approval. You don’t need to wait for months to get these loans. It’s easy to secure the financing swiftly. When you have some time-sensitive investment or renovation project, certainly these loans seem like the most suitable choice. Don’t you think?
If you apply for a traditional loan, lenders always consider your credit history to determine your interest rate and eligibility. In case your credit score isn’t amazing, you may not qualify for the loan. Hard money lenders, on the other hand, don’t consider credit score too much as they are interested in the value of the property you are planning to invest money into.
Borrowers pay high interest rates on hard money loans but the total interest paid isn’t as high as in the case of long-term loans. It’s because you pay off loans relatively quickly.
Factors Affecting Hard Money Interest Rates
Here are some factors that influence the interest rate of a hard money loan.
Loan-to-Value (LTV) Ratio: This is the ratio of the loan amount to the value of the property. When the LTV ratio is high, the loan becomes quite risky for a lender. As a result, they charge a high-interest rate.
As I mentioned before, hard money lenders pay more attention to your property and less attention to your credit score. In case your property value is high and it is in good condition, you can expect to get a better interest rate.
The interest rate varies from one lender to another depending on the loan policy each lender sets. So, if you shop around, you may find the right lender who offers you a hard money loan at a reasonable interest rate.
Another thing that determines the interest rate of a hard money loan is the location of the property. If the property is located in a prime area, a lender might be ready to lower the interest rate.
A hard money loan is a lucrative financing option for those real estate investors who want to flip a house or resell it after renovation. The interest rate on hard money is higher than traditional loan but you won’t have to wait for months for its approval. So, if you consider flexibility speed, and quick return on investment, certainly a hard money loan is the right choice of financing. However, always consider the terms and weigh the benefits against the cost to make the right decision.