Updated: Jan 12
For a variety of reasons, many real estate investors or properties don’t qualify for a traditional loan through a bank. This is where a hard money loan comes in. It can accomplish the same goal of helping investors secure funding for their upcoming projects or next investment property.
If you’re looking into getting one, you’re probably wondering how much hard money actually costs.
Actual Cost Associated With Hard Money Loans
In calculating the actual costs associated with hard money loans, make sure to avoid the most common mistakes. This requires some expertise. Many investors focus solely on the interest rate charged on the loan. It’s important to consider other costs in your calculations before agreeing on a lender.
Hard money loans cost significantly more than conventional loans. On average, the interest rate on a hard money loan ranges from 10% to 18% although hard money loan prices will vary from state to state and lender to lender. The interest rate on a conventional loan is about 5% to 9%.
Here are some of the costs that may be associated with your loan:
Interest Rate: Interest rates on hard money are higher than traditional loans, but the loan term is much shorter. Rather than just focusing on the APR, it is wise to consider the actual dollars that will be paid during the term of the loan. The average APR typically runs between 10-15%, depending on three things: the lender, the property, and the borrower’s qualifications
Points: This is the charge for originating the loan. It is calculated as a percentage of the loan amount. With most lenders, points can vary between 2-4% of the total loan amount. The actual points charged on your loan may depend heavily on the loan-to-value (LTV) ratio of your deal, the interest rate, and the risk or complexity of the loan
Processing and Underwriting Fees: Lenders typically charge a fee to process the loan application and documentation in order to underwrite the loan
Appraisal Fee: The borrower typically pays a fee for an appraisal by a licensed appraiser
Referral Fees: If you were referred to your hard money lender by a broker or realtor, a referral fee might be added to the cost of your loan
Extension Fees: Lenders expect you to pay back the loan within a specific timeline, usually between six months and two years, depending on the amount and other loan terms. However, if you find yourself unable to pay within the required timeline, some lenders may extend your deadline but charge an extension fee so make sure you ask a potential lender what happens if you need more time to repay your loan
Pre-payment Penalty: This is what some hard money lenders charge you for paying off loans early. They expect you to stay with the loan for the minimum time set so they can gain profits from your monthly interest rate. To ensure you don’t pay earlier, such lenders will impose a pre-payment penalty. Make sure to ask the lender about Pre-payment penalties or read through the fine print of the contract to see if this fee is part of the terms.
The cost of the loan will vary from lender to lender. Others have a fixed rate. Some lenders reduce their rate based on the amount borrowed or the loan size in comparison to the value of the property, or the number of loans you’ve made with them.
Hard money loans have become the go-to for house flippers who can't borrow money from traditional lenders such as banks. It could be that their credit isn't great or because the deal doesn’t pass the strict guidelines.
The borrower’s cost of hard money -- the interest rate and the loan origination fee -- is higher for these reasons. The rates are higher to compensate the lender for the increased risk of the deal.
Many real estate investors rely on hard money loans in funding their projects. As long as you carefully consider your options, this type of lending could help you in your next real estate venture.