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The Costs of Hard Money: Interest Rates and Points

When considering a hard money loan, it is important to understand the fees associated with the loan to ensure that you and the lender are on the same page. Because hard money loans represent significantly more risk than traditional bank loans, interest rates will be higher, and lenders will often charge “points” upfront.

The amount of money you can expect to receive in a hard money loan will depend on the value of the subject property. By understanding the structure of a hard money loan, you can make the most out of your investment opportunity

What are Points on a Hard Money Loan?

“Points” are the fees that a hard money lender will usually charge up front when they agree to lend you money. One point is equal to one percent of the total loan value. So, if a lender charges three points on a $100,000 loan, it would amount to $3000 that the borrower would be responsible for paying right away.  The amount of points that a hard money lender will charge usually depends on the perceived risk of the loan but may also be based on some other factors.

The points help the lender to cover their costs and generate cash flow, even if the borrower defaults on their loan. The points may also help the lender pay referral fees to a broker or to pay private investors who are backing the loan. Hard money loans can have anywhere between zero and ten points, but typically have between three and eight points. Because of the increased risk of hard money loans, lenders will usually charge three points more than a bank would charge.

Hard Money Interest Rates

Interest rates on hard money loans can vary significantly based on a number of factors. Some of the main factors that affect hard money loan rates are:

  • Loan to value ratio

  • Perceived risk of the loan

  • Type of property/project

  • Region/Competition among lenders

 

Anywhere from 7-15 percent interest is typical for a hard money loan, with most coming in at around 10 percent. Hard money interest rates will be higher than traditional bank loans because of the larger amount of risk incurred by the lender, however these loans are much easier to obtain than loans from banks or credit unions.

What is a Loan to Value Ratio?

The loan to value ratio (LTV) is one of the most important aspects of a hard money loan. The amount the lender is willing to lend is dependent on the value of the property (collateral) that they are loaning against. Hard money lenders will usually lend 65-75% of the current value of the property, as determined by an appraisal or broker opinion of value. Some lenders will lend based on the after-repair value (ARV) of a property, the value of the property after improvements are completed. These loans are riskier, and often command higher interest rates, but allow for borrowers to invest less of their own capital.

Find a Hard Money Loan in Minneapolis, Minnesota

Although hard money lenders charge higher interest rates and also require the payment of points up front, hard money loans can be right for many different types of people. For real estate investors looking to fix and flip, or for business owners looking to acquire property for their business in a short period of time, Hard Money LLC has loans available. Contact us to get started with your hard money loan today!

Do you need a Hard Money Loan for your next real estate purchase or refinance fast?