Hard money loans use the value of the real estate as collateral. It mostly comes from private investors willing to put up their capital instead of banks and other financial institutions that rely on significant amounts of outside funding. This post will discuss what influences hard money interest rates and how you can get the best rates.
Factors influencing Hard Money Interest Rates
Hard money interest rates vary from lender to lender. However, the rates for each lender are higher than those of conventional bank loans. This is because the lenders take on more risk with their loans and have no government backing. Due to the higher risk, the interest rates range from 10%-15% depending on the lender and the perceived risk of the loan. Your lender also assesses several things to come up with your monthly payments for hard money loans. These factors include:
Your Exit Strategy
Your exit strategy significantly impacts your hard money loan interest rates. This is because it determines how long the lender’s money will be at risk and how high the risk is. You should expect your lender to ask how you plan to pay back the loan as it affects various elements of your deal.
Loan-to-Value Ratio
Unlike conventional lenders, hard money lenders use asset-based underwriting for their funds. Therefore, the loan-to-value ratio plays a key role in determining your interest rates for the loan. If you’re willing to commit more money at the beginning of the loan, the less the loan will cost in the end.
Location
Hard money loan interests vary from region to region. For instance, many lending firms in one area lead to increased competition and decreased interest rates. That means you can pay lower rates for your loan. Similarly, if your region has a lengthy foreclosure process or laws that increase the risk to private lenders, the interest rates are higher to offset the risk.
Financing Timeline
Most real estate investors prefer hard money loans because of their reliability. However, there’s a difference in interest rates for loans that need to be funded in a few days than others that take up to four weeks. Loans that require quick funding turnaround require underwriting in a shorter timeframe, which increases the risk for the lender. Your interest rates could drop significantly if you can give your lender the time to do due diligence and handle the underwriting process.
How Can You Get the Better Interest Rates on Your Hard Money Loan?
Getting reasonable interest rates for hard money loans is not as easy as getting the best rates on a traditional mortgage. Different lenders have different priorities, making the process quite challenging. Luckily, the following tips will help you find the best rates on monthly payments for hard money loans.
Asking for Referrals
It is vital to make sure you’re working with a reputable and reliable hard money lender. You can find a good lender by getting referrals from people within your circle and other clients. They are likely to refer you to a lender with reasonable rates and one who goes above and beyond to satisfy your needs.
Know Your Options
You want to do your research, but it’s also important to know what you want before inquiring about rates. It will help you narrow down the options and pick one that matches your needs.
Be Honest in the Negotiations
Hiding information from your prospective lender might do more harm than good. You should provide them with all the financial details they need to approve your loan. They can lower your interest rates if they get the assurance to get their money back after servicing your loan. Also, be upfront with them about the rates you are looking for. They can find the best options for you or refer you to another lender.
Increase Your Leverage
You can get better rates by using more of the property to secure your loan. Also, putting a significant equity upfront makes the lender more likely to accept lower interest rates.
In Summary
Hard money loans are ideal options if you need quick and reliable funding for your project. However, you need to arm yourself with the knowledge about a successful application process and the factors that will influence your interest rates.
