The points are calculated in relation to the total loan amount. Generally, each point charged on your loan translates to 1% of the loan. So if you are borrowing $80,000 and charged 2 points, you’ll pay an upfront fee of $1,600.
They help to mitigate the risks of being a hard money lender. The points are also part of your closing costs when you take a hard money loan.
Each month you are supposed to pay interest. Even if you manage to repay earlier, the points will still provide cash flow (return on investment) to the lender.
Loan amount: $300,000
3 Points: 3% of $300,000 = $9,000
Note that you have to pay the points in advance. But you can always negotiate to pay later. The lender may agree to add the points to the principal amount so you pay towards the end of a loan term.
If that is the case, the example above would look like this:
Loan amount: $300,000 + $6,000 = $306,000
So, you will be borrowing the principal plus the hard money loan points.
Interest Rates, Terms, and Other Fees
The interest rate for hard money loans ranges from 7.5 and 15 percent. The term can be anywhere between 3 and 36 months. The points for closing the deal range from 2 – 10 percent of the overall loan amount. To view the rates, fees, and terms of actual companies you can browser our hard money lender directory.
How the lender's price the debt is a matter of equity, the extent of risk, and your experience in this type of financing. Conventional bank loans are guided by the Federal Reserve System. Whereas, hard money loan guidelines are developed by the lenders.
The loans are interest-only. So you get to repay the principal amount when the term comes to an end. As an investor, expect to receive a loan of up to 90% of your LTV (loan to value) or 75% of the ARV (after repair value). If you have to pay a down payment, it should be at least 10% of the LTV/ARV.
Are Hard Money Loans a Good Idea?
Hard money loans are good for fixing temporary financial needs. It is not something that’s going to linger for longer. Thus, there’s a need to plan ahead.
If you have a house flipping deal, approaching a hard money loan lender is a good idea. Since this is a short-term loan, you can amortize the points.
Hard money loans are created differently. Your terms depend on the deal you agree to sign with your lender. The state you are borrowing from matters too.
Because the loan is designed to be temporary, the interest rate should give you an incentive to repay as quickly as you can.
If we look at hard money lender vs. bank, there’s a lot to compare. Both accumulate interest over time. Then there are monthly installments to be paid. However, banks can penalize you for making prepayments.
When you take a hard money loan, you pay off the loan before high interest builds up. For this matter, you are less likely to receive a penalty for paying off the loan before the expected time-frame.