Often the first question asked whenever any type of loan is discussed or researched is, what are the rates? The rates, in this regard, are referring to the interest rates on the loan. It's an important question to ask because the interest rates on your loan will often be the biggest expense you incur when borrowing. Although a difference in rates may seem trivial, depending on the loan amount, the difference in expenses can be massive. When determining if your real estate investment can be profitable, ignoring the interest rate can set you up for failure.
How do loan interest rates work?
Interest rates for hard money loans are a bit more simple to understand than traditional mortgage interest rates. This is because traditional mortgages use what is called an amortization schedule to determine what your monthly payments will be. Every month you make a payment, the ratio of loan principle compared to loan interest that you are paying will slightly change as the loan balance becomes smaller.
Hard money loans are often interest-only, which means you do not make payments towards the principle until you are ready to pay off the entire loan in full. Also, while not all hard money loans work this way, many require that you pay the interest at the end of the loan along with the entire balance.
Essentially, the interest rate is the percentage of the loan amount that you will pay the lender in addition to the loan itself. It's often represented in yearly terms - meaning you pay that percentage every year the loan remains unpaid. If you have a hard money loan for $400,000 with an interest rate of 9%, you can expect to pay 9% of $400,000, or $36,000, in interest every year that you hold the loan. If you held this loan for two years, you would pay the lender $472,000 back at the end.
Why do hard money rates differ from mortgage rates?
Traditional mortgage rates are often significantly lower than hard money loan rates. This is for several reasons:
Risk
Interest rates are tied to the level of risk for the lender. As with all forms of investment, the higher the risk the higher the reward has to be in order for it to be worth taking those risks. Hard money loans are more risky investments than traditional mortgages thus the higher interest rate you will have to pay.
Market demand
There is intense competition among banks, or soft money lenders, offering traditional mortgages thus they must keep their rates as low as possible to remain competitive. Also, the number of individuals looking for mortgages is exponentially higher than those seeking hard money loans. When your options are limited, prices tend to be higher.
Urgency
Hard money loans have many benefits, one of which is the ability to become available urgently. These lenders are often able to close a loan in a matter of days rather than the months it takes a bank to issue a mortgage. This convenience also comes with a price.
Qualification
Qualifying for a mortgage is not easy and many do get turned down for a variety of reasons such as low income, existing debt, or a low credit score. Hard money lenders often are only interested in the asset, or property, being put up as collateral against the loan. It is the loan-to-value (LTV) ratio that tends to be the most important criteria for them.
What are the average rates for hard money loans?
There is no simple answer to this question because loan interest rates are constantly fluctuating due to market conditions. What they are now can be dramatically different a year or two from now. Also, the underlying deals for a hard money loan usually vary greatly in terms of the collateral, the borrower's past investment experience and relationship with the lender, the duration of the loan, and many other things. As mentioned earlier, interest rates are always a reflection of risk. If you present a lender with a low-risk opportunity, you can expect a lower rate. Rates also vary greatly from lender to lender.
On average, we've seen the lowest-end of hard money loan rates being 1 to 2 percentage points higher than the traditional mortgage rates all the way up to about 5 times. At the time of writing this, mortgage rates are averaging 6.0-7.5% so we are seeing hard money rates between 9.5-14%. It is a dramatic range, that's why it's important to find the best lender you can to work with.
How do you find the best rates on hard money loans?
Before starting to search for which lenders offer the best rates, you are better off finding lenders that match your loan criteria and are willing to offer you a loan. There is no point finding a lender with a great interest rate if they are not interested in funding your investment with a loan. Each lender has different parameters, including the loan amount, LTV, past investment experience, and so on.
We recommend using our platform to find lenders that match your needs exactly and are willing to provide you with a hard money loan. Once you have your list of lenders, you can simply compare their rates and fees, such as points, in order to determine which lender best suits you. Getting matched with lenders only takes 1-2 minutes by answering a few quick questions.
