Hard Money Loans Are not for People with Soft Stomachs
When you are looking to buy or refinance a piece of property, whether it’s an apartment building or a commercial property, the best route usually is to get a conventional loan for it. But that might not always be possible or it may not be the best option for your situation. There are some other options, including a hard money loan. If you aren’t familiar with this type of loan, you may be asking yourself, “how does a hard money loan work?” Here are some facts about hard money loans and how they work.
Hard money loans are essentially short-term loans secured by real estate that come from somewhere other than a bank. Hard money loans usually come from private investors or groups of private investors, such as hedge funds or private equity firms.
If you are considering hard money loans, there are some things you need to be aware of. Hard money loans carry much higher interest rates than conventional loans. In fact, hard money loans can have interest rates that are 15% or even higher. Hard money loans also have much shorter payback periods, usually anywhere from one to five years. Another thing to know when you are wondering, “how does a hard money loan work?”, is that you have to have a lot of equity in the property on which you are seeking a hard money loan. Most lenders ask for at least 30% equity, and some go as high as 50%.
These things all seem like disadvantages when compared with conventional loans, so you may be wondering why anyone would want a hard money loan. There are some advantages. For one thing, you can get the money pretty fast, usually within a week or two, which can be important if you are trying to close on a property quickly. Conventional loans usually take a month or more to close. Another advantage is that hard money lenders will take on riskier borrowers. Because of the high interest rates and high levels of equity, hard money lenders are more protected and are willing to deal with riskier borrowers. So if you have plenty of income and assets but a bad credit history, hard money loans might be a better option than conventional loans.
It’s important to consider all your options when looking for a real estate loan, and a hard money loan may be something you want to consider.