What Every Borrower Should Know Before Refinancing a Hard Money Loan

by HMLS

Hard money loans are usually sought after for short-term real estate deals or as a temporary (bridge) financing solution for long-term projects. While using a hard money loan is a convenient funding option, it carries a higher interest rate than traditional term loans. Refinancing a hard money loan is a great exit strategy if you want to cut down your interest burden or reduce the overall repayment amount.

Like with other borrowing transactions, it’s important to evaluate all available options inside and out before you can proceed with the best refinance deal. In this guide, we’ll be looking at the following:

  • How to get out of a hard money loan—all types of refinancing and cash-out solutions
  • What qualifies you for a refinancing loan
  • What other exit strategies to consider

Why Cash Out or Refinance a Hard Money Loan—The Basics

Hard money loans are easier to take out than traditional loans because of fewer bureaucratic regulations involved in the approval process. They’ve been popularized by real estate investors—more specifically, property flippers, who get a quick loan using the property in question as collateral, renovate it, and sell it at a massive profit. The lump sum cash flow enables investors to pay off the loan within a short time (say, a year). They don’t mind the short-term and high-interest payments because the loan is a part of their investment business model.

In the current market, hard money loans are being used to snowball all kinds of projects—from novel business ideas to long-term construction contracts. Borrowers opt for cash-out or refinancing loans when they need a larger repayment window with more favorable terms.

The option is typically viable when the cash flow from the asset in question is passive, unpredictable, or accrued gradually, and it is difficult to keep laying out large interest payments. Refinancing is a popular choice for borrowers investing in:

  • Rental properties
  • Startups
  • Business expansions
  • Delayed projects
  • Slow-selling properties

Source: Andrea Piacquadio

Cash-Out Refinancing vs. Regular Refinancing—What’s the Difference?

Regular refinancing is swapping your current loan for a new one—the principal sum remains the same, but the rate of interest and/or the repayment period can be different. Say you owe $185,000 at 15% per annum on a 2-year hard money loan. If you refinance the loan, you’d still owe $185,000, but you may secure a lower interest rate or a larger repayment window.

Cash-out refinancing replaces your existing loan with a larger liability. Let’s take our example from before—you can easily refinance a $185,000 loan for $200,000, provided you have enough equity in the property or collateral.

The terms of a cash-out loan (presumably favorable to the borrower) are determined by the refinancer. Such loans are only useful when you want extra capital to spend on virtually anything, like home renovation, debt consolidation, or personal investment. Note that the risk involved is also greater because you’re signing up for more debt.

How To Refinance Out of a Hard Money Loan

There are plenty of ways to refinance or cash out a hard money loan—primarily via two channels:

Refinancing ChannelExamples
TraditionalBanks
Financial institutions
Credit unions
Government agencies
Non-traditionalHard money lenders
Angel investors
Community development financial institutions (CDFIs)
Peer-to-peer (P2P) lenders

Both traditional and non-traditional refinancing routes have pros and cons. Your ultimate lender choice should depend on:

  1. Target interest rates and loan term
  2. Your personal finance and credit history
  3. Urgency of the situation
  4. Desired level of convenience

How To Refinance a Hard Money Loan With a Conventional Loan

Many traditional lenders offer attractive refinancing and cash-out loan packages to cover your long-term funding needs, provided you’re eligible. Refer to the following table to understand the major qualification requirements for conventional loans:

Eligibility ParameterDetails
Qualifying credit scoreYou need to have an above-average credit score (at least 600) to secure financing via traditional means 
DTI (debt-to-income) ratioDTI ratio indicates the debts you have as a percentage of your income. Most traditional lenders sanction loans only to people with less than 50% DTI
Property insuranceA traditional lender may ask you to get a mortgage or similar insurance if your equity in the property (the amount you contributed) is low—usually less than 20% of its value
Minimum equityTraditional lenders may specify the minimum equity you need in the property. The standard equity requirement is 5% for regular and 20% for cash-out refinancing

Certain lenders may also want copies of your tax returns, W-2 forms, and similar documents dating back several years. Once you submit the paperwork, you have to wait for 60–90 days for your loan to be approved or rejected.

Source: Matthias Zomer

If your loan gets approved, you can expect the following:

  1. Interest rates between 6%–8%
  2. Repayment term of up to 30 years

Here’s a summary of the pros and cons of traditional refinance loans:

ProsCons
Low interest rates
Long repayment window
Strict and inflexible requirements
Heavy paperwork
Time-consuming process

These loans are most suitable for self-occupied residential units, but the slow-paced proceedings force you to pay your existing high interest rate for a long time.

How Can You Refinance a Hard Money Loan via Non-Traditional Channels?

Traditional refinance loans work only if you have a strong credit history and are okay with slow processing. Non-traditional lenders offer fast approvals and more flexibility in terms of eligibility requirements and paperwork. The convenience comes at the price of higher interest rates that range from 8% to 22%.

The most popular all-purpose, non-traditional refinancing lending channel is hard money lending. Other options like peer-to-peer lending, invoice factoring, and equipment financing are not readily available and cover select situations only.

Refinancing a Hard Money Loan With Another Hard Money Loan

Hard money lenders are private investors, companies, or agencies that don’t explain their lending decisions to credit bureaus like traditional lenders have to. In most cases, they are willing to refinance your existing hard money loan solely based on the:

  • Collateral value—Hard money lenders consider the latest appraised value or purchase price of the collateral in question
  • Equity contribution—Hard money lenders evaluate a borrower’s equity in the collateral. The general rule is that if a person has put down 20% or more of their own money into the asset, they’re less likely to default. More equity also suggests the LTV (loan-to-value) ratio would be lower. Most hard money lenders charge minimal interest rates if the LTV commitment is low

Source: Kindel Media

Certain lenders may also review your credit history, but a bad credit score is usually not a deal-breaker. Here’s a summary of the pros and cons of hard money refinance loans:

ProsCons
Lax eligibility requirements
Quick approval
Less paperwork
Flexible refinance terms
Higher interest rates
Fewer choices

The biggest challenge is finding a hard money lender that offers more favorable terms than your existing lender. Before you finalize a loan, compare the different lenders in your area in terms of the:

  • Paperwork involved
  • Refinancing terms offered
  • Processing time
  • Customer service

Get the Best Refinance Rates and Terms With Hard Money Loan (HML) Solutions

If you’re looking to refinance an unfavorable hard money loan, Hard Money Loan (HML) Solutions can come to your rescue. The Florida-based group facilitates all types of hard money lending deals and is backed by reputable investors and experienced entrepreneurs in the state. 

HML Solutions commands a stellar rating of 5 stars on Google and gets consistently good consumer reviews, which is rarely seen in the hard money lending industry.

With HML Solutions, you may opt for both regular refinancing and cash-out refinancing packages with best-in-class terms. Here’s what you can expect:

AspectHML Solutions
Interest rates9.99%–12%
Term1–3 years
Interest rate typeFixed
Loan amount$100,000–$50,000,000
LTVUp to 70% of the current purchase price or appraised asset value (whichever is lower)
Origination fee2 points or 2%
Closing time3 days to 2 weeks
AmortizationInterest only

The HML team also funds other high-value personal or commercial investments, such as:

  • Purchase of single- and multi-unit residential properties
  • Construction and reconstruction
  • Business acquisition
  • REOs (real estate-owned purchases)
  • Acquisition of bank-foreclosed properties
  • Investment in special and/or unicorn projects
  • Bridge funding
  • Short selling
  • Fixing and flipping

Source: RODNAE Productions

Refinancing a Hard Money Loan With HML Solutions—What To Expect

HML Solutions ticks all the right boxes in terms of quality refinancing. HML lenders follow a highly flexible lending mechanism—you get tailored rates, repayment options, and other terms based on your personal situation. 

Apply for an HML Solutions loan to enjoy:

  1. Relaxed eligibility requirements—HML Solutions overlooks bad credit scores, faulty tax returns, and other strict variables because the group’s vision is to help everyone out regardless of their background
  2. High-speed approval—Refinancing and other loans usually get approved within 3–10 days with HML Solutions because of:
    1. Minimal paperwork involved
    2. Priority treatment to every borrower
    3. Time-sensitive processing 
  3. Transparent communications—HML lenders don’t beat around the bush. If you don’t qualify or your collateral has some issue, you’ll get an immediate response so that you can consider alternative lending options
  4. Honorable funding commitment—Many hard money lending groups get a bad rap because they back out of financing at the last moment, but the lenders at HML stand by their word
  5. Personalized treatment—HML Solutions adheres to the highest professional standards while still retaining a humanist approach. The lenders often advise other borrowing solutions to rejected applicants. Defaulters are also offered a chance to repay the loan on different terms. Foreclosure is usually carried out as a last resort (know that defaulting on a loan with hard money lenders doesn’t impact your credit status)

How To Apply to HML Solutions for Refinancing an Existing Loan

You can talk to an HML loan officer directly—fill out a loan application form online to request a call. All you have to do is provide your business and collateral details—your info is treated with the utmost confidentiality and only used for project evaluation.

The refinancing process at HML Solutions generally goes through three stages:

  1. Discussion—Share the details of your existing loan and collateral upfront with the HML lender. Mention what terms you’re looking for in a refinance or cash-out package. Provide clarifications (if asked) so that you’re offered a realistic and manageable loan package 
  2. Evaluation—The team will analyze your deal to make an informed lending decision. They may conduct a property appraisal if necessary. Applicants with no-hassle collateral and enough equity are usually approved right away
  3. Closure—Once you make the deal, all there’s left is to wait for HML Solutions to handle the paperwork and title work. No down payment is required

HML Solutions can set up your refinancing loan within three days at the earliest if the property has recently been appraised and the paperwork is already in order.

Source: Karolina Grabowska

How Soon Can You Refinance a Hard Money Loan?

The waiting period (also called the seasoning period) for refinancing a hard money loan depends on the lender. Most lenders ask you to wait up to one year before considering refinancing solutions. If you refinance early, you’ll be asked to pay a prepayment penalty to compensate for the loss of interest income suffered by the lender.

If you take out any loan with HML Solutions, you are free to refinance it after six months without worrying about any penalty. In case your existing hard money lender asks for a penalty for switching, you can choose HML’s cash-out refinance loan to cover the excess cost.

Getting Out of a Hard Money Loan—Other Exit Strategies

If you’re unable to secure a refinancing loan, you should look into other funding options. Here are some possible exit strategies to consider:

  • Selling the asset held as collateral is the most common exit strategy in urgent situations. In most cases, even if the property doesn’t bring a profitable price, the proceeds should be enough to cover the LTV
  • Getting personal loans from friends and relatives or opting for crowdfunding is another option in worst-case scenarios, especially if you have decent networking abilities
  • Selling other investments or assets is another last-ditch solution if you see no viable way to honor your loan commitment

Many people go to loan sharks in desperate situations, but keep in mind that these lenders are unlicensed and may even use threats to extract money. Beyond traditional borrowing, dealing with a hard money lender is one of your safest options. 

Featured image source: krakenimages

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