What Will A Hard Money Loan Cost Me?
Posted July 2nd, 2009 in Mortgage Loan InsightsIf you're new to "hard money" loans — and many folks are in today's economy — it's likely your basis for understanding and comparing hard money lending will be based on what you already know about conventional bank loans.
Bank loans are bank loans. Hard money loans do not compare to bank loans. They are polar opposites despite having common logistical processes. The best bank loan offers a low interest rate and fees with longer terms. A hard money loan (secured by residential property for purposes of this article) is a short-term fix with a premium price tag that's less restrictive in some ways and more restrictive in others, designed to bridge a gap between situations until it can be paid off or replaced with a bank loan.
Are you a good candidate for a hard money loan? Perhaps, but then again maybe not.
Qualifying for a conventional loan from a banks or credit union, however, is difficult or impossible for many people today for various reasons. Sure, there are insured loans — FHA, VA, and the like available to those with less money to put down or who have less-than-perfect credit, but other factors like income / debt ratios, employment history, and asset reserves still matter. Second mortgages are restrictive and even more difficult to qualify for than first mortgages. Lenders restrict the number of properties you can have financed at one time. Banks adjust their lending guidelines fast and often, sometimes terminating a loan midstream. And there's a mountain of new and pending legislation on Federal and State levels that do more to hinder the process of qualifying for a loan nowadays than help. It's no wonder that so many property owners today are looking to hard money loans as an alternative to bank financing.
In some cases a hard money loan may prove to be the answer, provided you're goal-oriented as opposed to "process-oriented". The two are not the same, nor can they co-exist–you are predominately one or the other. It's a scientific fact that the left side of the brain processes analytical information — in the case of a mortgage loan that would be interest rates, fees, payments etc, while the right side of the brain is the creative side and adept at considering the "bigger picture" like the goal of consolidating debt or the dream of owning an investment property. Humans are either left or right brain dominant and this effects how you both perceive and compare loans.
The truth is that the overwhelming number of people who inquire about a hard money loan will never obtain one. There are two primary reasons.
The two reasons are:
a) lack of a sufficient cash down payment or equity required to qualify, and/or;
b) an unwillingness to accept the high interest rate and points inherent in every hard money loan, even if it seems to be the only option available.
I can minimize the shock, disappointment, and frustration surrounding this most fundamental issue of hard money loans.
The First Rule Of Hard Money Lending:
You will NOT pay "a little more" for a hard money loan versus a bank loan. If having a low or moderate interest rate with reasonable points and loan fees means more to you than the ultimate benefit of the loan don't even bother pursuing hard money — you are left-brain dominant and not the type of person who will likely be able to bring yourself to pay the rate and costs associated with a hard money loan.
If you're a number-crunching loan shopaholic, I've just saved many you hours, days, maybe even weeks of frustration and disappointment in your quest for a low-rate, low-fee hard money loan.
On the other hand, if you're the type of person who can see past the rate and fees and is instead focused on the benefit a hard money loan can provide you're halfway to your goal.
The average hard money loan carries an interest rate 2 – 3 times higher than a bank loan. Most hard money loans are "interest-only", but a bank loan of $200,000 at 5.25% amortized over 30 years is still $646 less per month than an interest-only loan of the same amount at 10.5% with interest-only payments from a hard money lender. Shopping around for a good deal on residential hard money is also pointless and a waste of time unless it's your goal to keep the hard money loan for more than 2 or 3 years (you need a better financial plan if that's your intention). You can scour the Internet shopping hard money rates, but in the end you still won't have anything remotely close to a bank loan. Shopping for a "good deal" on hard money is like looking for lemons in a lime orchard.
You will pay multiple points for the loan — points are a percentage of the loan paid to the lender and/or the broker that are 2 – 10 times more than you'd pay for a bank loan depending on the lien position, loan structure, and other factors too numerous to mention here.
You use a hard money loan to help transition from one situation to another — usually a less-than-ideal one to a better one — for a price that's more than you'd pay if you were going from an already good situation to a better one (i.e., refinancing a bank loan to a lower rate).
So the question becomes whether your purpose for the loan outweighs the cost. It's a simple analysis but one that many people cannot resolve.
Bottom Line: Assuming your circumstances qualify for a hard money loan, ask yourself what's more important — the net benefit of what the loan accomplishes for you or the payment and costs associated with the loan. Think hard and be honest with yourself. Most people want the benefit of a loan and not have to pay much for it, which is precisely why hard money is NOT a good fit for the vast majority of people. If the cost of the loan is what is driving you forget hard money.
Alternatives to hard money: Get a bank loan. Borrow from another source — retirement account, friend, family member. Save money and pay off consumer debt. Negotiate settlements with installment agreements rather than borrow. Most people who want a hard money loan have credit scores below 620, a recent bankruptcy or foreclosure, can't document sufficient income to qualify, or have issues that need to be resolved with cash from real estate. Despite these issues most people also want something familiar, and that's a bank loan and not hard money.
On the other hand, if you're the type of person who understands that the cost of a short-term solution like a hard money loan is worth the benefit in the long run, give me a call — I'd like to talk with you!
