Pros and Cons
There are several good reasons to consider getting a hard money loan instead of a conventional mortgage from a bank. Here are the main benefits this lending option offers to investors:
- Convenience – Applying for a mortgage is time-consuming, particularly thanks to new regulations on mortgage lending implemented as part of the Dodd-Frank Act. It can take months to close on a loan, which puts investors at risk of losing out on a particular investment property. With a hard money loan, it’s possible to get funding in a matter of DAYS. That’s important if you’re funding a large-scale development project and can’t afford deviations from the timeline to completion.
- Flexible terms – Because hard money loans are offered by private lenders, it’s possible for investors to have more room for negotiation of the loan terms. You may be able to tailor the repayment schedule to your needs, for example, or get certain fees.
- Collateral – With a hard money loan, the property itself usually serves as collateral for the loan, but again, lenders may allow investors a bit of leeway here. Some lenders, for instance, may allow you to secure the loan using personal assets, such as a retirement account or a residential property you own.
Hard money loans aren’t a perfect financing solution, and there are two primary drawbacks to consider:
- Cost – Hard money loans are convenient, but investors pay a price for borrowing this way. The rate can be up to 4% higher than for a conventional loan. Origination fees, and closing costs are also likely to cost investors more.
- Shorter repayment period – The purpose of a hard money loan is to allow an investor to get a property ready to go on the market as quickly as possible. As a result, these loans feature much shorter repayment terms than traditional mortgage loans. When choosing a hard money lender, it’s important to have a clear idea of how soon the property will become profitable to ensure that you’ll be able to repay the loan in a timely manner.
Hard money loans are a good fit for wealthy investors who need to get funding for an investment property quickly, without any of the red tape that goes along with bank financing. When evaluating hard money lenders, pay close attention to the loan fees, processing fee, underwriting fees, interest rates and loan terms. If you end up paying too much for a hard money loan or cut the repayment period too short, that can influence how profitable your real estate venture is in the long run.