All loans come with rates and terms. Hard money is no different. Even though hard money loans are funded by private lenders rather than banks or credit unions, lenders still propose rates in terms. It is just that those rates and terms can vary quite a bit from one loan to the next.
Hard money loans are typically customized to the needs of the borrower. That’s why it’s so important to make sure you understand loan terms before you sign. For the record ‘term’ generally means the amount of time you have to pay back the loan. It is separate from interest rates and fees.
Time to Repay
Obtaining a hard money loan is dependent on the strength of your collateral. As for how long you will have to pay back what you borrow, that depends on the terms offered by the loan contract. Salt Lake City’s Actium Partners says that most hard money loan terms do not go any longer than two years. In fact, two years would be on the high side.
A typical hard money loan has a term of one year or less. One of the loans Actium made in the fourth quarter of 2021 had a 60-day term. That was more than enough for the borrower. In this particular case, the borrower was looking to finance the purchase of an office building. The borrower was eligible for an SBA loan, but the loan could not come through quickly enough to close the deal.
Hard money made it possible for the borrower to close on the office building. Once his SBA loan came through, it would be used to pay off the hard money loan. For him, 60 days was more than enough time. As for Actium Partners, the 60-day term was ideal because it allowed them to get in and out quickly.
Interest Rates and Fees
Because hard money loans are so limited in their terms, lenders have to charge higher interest rates to make lending worthwhile. So anyone hoping to obtain a hard money loan should definitely plan on a higher interest rate. How high? There is no way to know. Rates change all the time.
Like banks and credit unions, hard money lenders also charge certain fees for the service. The origination fee is a good example. It may or may not be higher than what a bank would charge for a similar loan. As for other fees, these can vary. Some lenders will charge appraisal fees, title search fees, and so forth. It is really up to the lender.
Understand All the Details
The lesson here is that borrowers need to understand all the details of a loan deal before signing documents. Like conventional loans, there is risk involved in obtaining a hard money loan that one cannot truly afford. Collateral offered to secure the loan is at risk in such cases. Unfortunately, hard money lenders can’t afford to be as patient when borrowers default.
Getting approved for a hard money loan that you cannot afford could result in your property being foreclosed on. That would obviously not be good. So before you sign, make sure you understand the terms clearly. Do not be afraid to ask questions, either.
Terms on hard money loans can vary drastically. Lenders tend to tailor loan deals to the needs of the client, giving them plenty of flexibility to do things differently on each deal. If you are planning to apply for hard money, know this going in. Be prepared to read and understand the terms of any loan proposal. It is in your best interests.