Is It a Profitable Deal? Hard Money Loan Rates and Hidden Costs Explained

by HMLS

Getting a hard money loan is a popular borrowing option for real estate financing and funding for long-term and short-term projects and deals. Unlike banks and other conventional lenders, hard money lenders readily overlook your credit score, tax returns, and debt status because the loan is completely backed by your residential or commercial property/asset. It’s a great deal, especially in tight situations, but what financial obligation do you commit to in return?

In this guide, we’ll discuss average hard money loan rates and other costs that form part of a borrower’s total monetary commitment. We’ll also cover:

  • Factors affecting hard money lending rates
  • Tips to get the best interest rates on hard money loans

How Much Does a Hard Money Loan Cost?

A hard money loan can cost around 1.15 to 3 times more than conventional loans due to higher interest rates. Your eventual outlay depends on the terms of your hard money borrowing package.

What Makes Hard Money Loans Pricier?

Hard money loans are generally pricier than traditional loans because of three factors:

  1. Weaker payoff guarantee—Traditional loans are guaranteed against collateral and a borrower’s future income, while hard money loans are only backed up by collateral (usually land, self-occupied property, or a similar fixed asset). When someone defaults on a soft money loan, the lender can put a claim on the borrower’s future income and collateral. Hard money lenders can only sell or auction the collateral to recover their investment or related costs, and the process is quite tedious. The greater risk from the lender’s perspective entails a higher borrowing cost
  2. Less stringent background checks—Traditional lenders conduct strict bureaucratic background checks. They look at your credit score, past debts, tax returns, and other documents to assess your ability to repay the loan. Hard money lenders have a far less rigid personal evaluation process as they’re more concerned with checking the value of the collateral than validating your future income flow. Even people with poor credit scores and tax defaults can secure a hard money loan, so charging a higher interest rate makes sense to the lenders
  3. Faster processing—Bank loan approvals can take up to two months, but if you qualify for a hard money loan, you’ll typically get approved within three to 14 days. The overall convenience comes at a price, i.e., higher interest rates

Source: Arina Krasnikova

What Are the Cost Components of a Hard Money Loan?

As a potential borrower, you should be aware of the three major cost components of a hard money loan. Refer to the following table for details:

Hard Money Loan Cost ComponentDescription
Interest rateThe amount that is calculated as a percentage of a fixed or reducing principal and payable annually, half-yearly, or quarterly, depending on the terms of the lender
Down payment or self-contributionDown payment is a crucial element of both traditional and non-traditional financing. Lenders typically don’t fulfill 100% of your financial need, so you have to invest some of your own money into the deal
Auxiliary chargesAuxiliary charges can refer to anything from handling fees to legal charges

Let’s go over the average figures for these cost components below.

What Are the Current Hard Money Loan Interest Rates?

The average hard money loan interest rate is between 8% and 15% (annualized). Keep in mind that the interest rates look different if the lender uses monthly quotes—for example, a 1.5% monthly interest would mean an 18% annualized rate.

Hard money lending rates aren’t that high from the perspective of those borrowing for a short period (a year or less). The current traditional mortgage rates are pushing towards 7% annually. Say you take a 10% hard money loan and repay it within six months—you effectively pay only 5% on the principal, which is close to general mortgage rates. Add to that the ease and efficiency of processing, and it becomes obvious why a hard money loan is considered to be a:

  • Sophisticated borrowing tool for seasoned property dealers
  • Profitable investment opportunity for people with surplus cash

Your traditional bank mortgage rates are super sensitive to inflation and change every few months. In the case of hard money loans, the interest rates are more affected by the facets of your deal than inflation.

What Influences the Interest Rate on a Hard Money Loan?

The general rule is that the higher the lending risk involved in your deal, the higher the interest rate you pay. Some crucial factors that influence the effective interest rates for hard money loans include:

  • Loan-to-value (LTV) ratio—LTV ratio denotes the amount that the lender will offer as a loan, usually expressed as a percentage of the value of the collateral or the asset being purchased. Common LTV ratios are in the range of 30%–80%. Lower ratios fetch low interest rates because the borrower is less likely to default
  • Nature of your deal—Borrowers go to hard money lenders with all kinds of deals involving various degrees of risk. You’ll enjoy better interest rates if your repayment strategy has fewer variables. That’s why hard money loans for a volatile business or a rental property in a remote area command high interest rates
  • Frequency of your hard money loan dealings—Experienced real estate investors who frequently borrow hard money loans (and repay them on time) have a good reputation among lenders, so they tend to get better rates than first-time or occasional borrowers
  • Personal credit—Certain lenders may offer lower rates if you have a healthy credit score and diligently filed tax returns, indicating your financial literacy
  • Loan term—Hard money loans are usually issued for 1–3 years. Some lenders may charge higher interest rates in the first few months, especially if the borrower is likely to consider low-rate refinancing options via traditional lending channels

Do All Hard Money Loans Require Down Payment?

Technically, yes—you need a down payment or self-contributed funds for hard money loans, but it may not be a requirement stated by the lender.

Down payment, in the case of hard money loans, means the amount you put down towards your financial obligation. It’s not necessarily something you deposit with the lender (as is the case with most traditional mortgages) but rather the sum you arrange on your own, either from your savings or by borrowing from other sources.

The amount you contribute depends on the lender’s LTV ratio (expressed in percentages), which is calculated as follows:

  • Offered Loan Amount ÷ Appraised Value of the Asset To Be Purchased or Collateral

Say the lender offers 70% LTV, and you need $200,000 to purchase the asset—the lender will provide $140,000, and you must manage to contribute ($200,000*30%) $60,000 on your own.

Most hard money lenders go up to 75% LTV—this ensures the borrower has invested sufficient equity in the deal, which in turn waters down the risk of default. Some hard money lenders offer 90%–100% financing specially focused on non-owner occupied fix and flip deals or long-term, ground-up construction projects, but the effective interest rate for such funding is usually upwards of 14%.

What Other Charges Can You Expect for Hard Money Borrowing?

Besides down payment and interest commitment, closing a hard money loan involves additional costs like:

  • Origination fees (for processing and handling, usually 1%–3%)
  • Legal charges
  • Retainer fees
  • Underwriting fees
  • Title insurance
  • Appraisal charges (if your property hasn’t been appraised recently)

Hard money lenders may ask for relevant expenses as they accrue or charge a fixed blanket rate (generally 0.25%–3%) of the asset value as the total handling fee.

Source: Engin Akyurt

Grab the Best Deal—Get Competitive Interest Rates With Hard Money Loan Solutions

If you’re looking for reliable and reputable hard money lenders, apply for a hard money loan with Hard Money Loan (HML) Solutions. The Florida-based group is backed by veteran business professionals and entrepreneurs looking for gem investment opportunities in real estate and novel projects. 

HML Solutions can arrange immediate funding for all purposes, such as:

  • Real estate acquisition
  • Construction projects
  • Purchase of single or multi-family units
  • Short selling
  • REO (real estate owned) dealings
  • Bank foreclosure management
  • Bridge financing
  • Rehab financing

Hard Money Loan Solutions charge interest rates between 9.99% and 12%—their offers are always competitive and have terms favoring the borrower. You don’t pay any penalty if you repay the loan anytime after six months. The following table will help you get an estimate of your total financial commitment:

AspectHML Solutions
Term1–3 years
Loan amount$100,000–$50,000,000
LTVUp to 70% of the current purchase price or appraised asset value (whichever is lower)
Interest rate typeFixed
Origination fee2 points or 2%
Closing time3 days to 2 weeks
AmortizationInterest only

With HML Solutions, every borrower gets tailored terms and conditions best suited to their situation.

Why Borrowers Prefer HML Solutions

HML Solutions offers one of the fastest, no-fuss ways to acquire a hard money loan. All you have to do is drop an online loan application—a member of the team will call you and handle your situation with full expertise on a case-by-case basis. Their services have a rating of 5 stars on Google, with many rave reviews about the group’s:

  1. Fast processing—HML Solutions is a great option for time-sensitive deals. If you have a solid deal and the required paperwork is in place, you can get approved in as early as three days
  2. Transparent dealings—Every in-house decision that influences the borrower is communicated rapidly so that the deal moves forward at an even pace 
  3. Tolerance for low credit scores—You won’t have to explain your creditworthiness or past financial setbacks as long as you present a strong collateral deal. Borrowers from all backgrounds who can meet the LTV gap and have enough equity in the property are usually approved
  4. Commitment to funding—Once your application is approved, HML Solutions will honor the funding no matter what
  5. Helpful behavior—HML Solutions has a friendly, solution-centric approach to every customer. If the lenders at HML cannot fund you for any reason, they’ll try to suggest alternative financing options. Defaults are also handled with prime sensitivity towards the parties involved

Source: Sebastian Herrmann

HML Solutions—Loan Application and Approval Process

Here’s a snapshot of how a hard money loan is set up with HML Solutions:

  1. Application and discussion—First, you fill out the online loan application form. When you get a phone call from an HML Solutions expert, discuss the details of what you provided on the application and cover any other queries with the expert
  2. Approval process—HML Solutions will evaluate the logistics of your deal and conduct asset appraisal if necessary. The lender group also accepts jewels, gold, and other valuables as collateral. If you qualify, you’ll be presented with a customized hard money loan package
  3. Deal closure—Once the deal is live, you’ll wait for HML Solutions to complete the paperwork and allot you the funds

HML Solutions is all about supporting individuals and businesses with a healthy growth mindset—reach out today to discuss competitive rates for your borrowing situation!

What Is the Risk Component of Hard Money Loans?

When it comes to hard money loans, the biggest risk for the borrower is losing the collateral in case of default—but again, that’s what happens when you default with any traditional lender. Some lenders are also upfront about charging a minimal prepayment penalty if you pay off within a short window (to make up for the loss of interest income).

Hard money lenders can be more lenient towards defaulters because they’re running a private business and are focused on building long-standing customer relationships. Lenders like HML Solutions consider offering defaulters an extension or discussing other repayment strategies—foreclosing on the collateral is usually the last resort.

How To Get Low-Interest Hard Money Loans—Useful Tips

Here are some tips on obtaining low interest rates shared by regular users of hard money loans:

  1. Invest more personal funds to keep the LTV ratio low
  2. Engage with the same lender (if you’re satisfied with their services) to get perks for your loyalty
  3. Build a rapport with popular hard money lenders in your network
  4. Maintain top-notch financial hygiene by paying your dues on time
  5. Keep looking for profitable real estate deals that impress lenders without a shred of doubt

Know that low interest rates may not be possible in every situation. Do your due diligence and be wary of lenders who offer low rates but charge exorbitant amounts in the name of other charges.

Featured image source: Karolina Grabowska

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