Private Mortgage Loan Rates: A Complete Guide to Costs and Fees

Getting a mortgage through a private lender rather than a traditional bank or lender can seem appealing, especially if you don’t qualify for a conventional loan. But private mortgages come with pros and cons borrowers should weigh. One key factor is determining the rates and costs you’ll pay with a private home loan.

Private mortgage rates can vary greatly depending on the individual lender, your financial profile, the loan program, and loan terms It pays to shop and compare rates from multiple private lenders to find the best deal. Read on to learn more about current private mortgage rates, associated fees, and how to get the ideal rate for your situation

What Are Current Private Mortgage Rates?

Private mortgage rates are set by the individual lender based on specific loan terms and the perceived risk of lending to a particular borrower Rates can range widely from around 4% to well over 10% for some high-cost private mortgages

According to data from the Mortgage Bankers Association, current average rates for prime mortgages are:

• 30-year fixed rate: 6.3%
• 15-year fixed rate: 5.5%
• 5/1 adjustable rate: 5.4%

Private mortgage rates may be lower, the same, or higher than these averages. Much depends on the borrower’s finances and credit. Borrowers with pristine credit scores, low debt-to-income ratios, and ample assets for a down payment should expect to qualify for rates more in line with prime mortgages.

Borrowers with poorer credit or who represent a higher risk will pay more for a private mortgage. It’s not unusual to see private loan rates of 8 to 12% or even higher for borrowers with very low credit scores below 620.

What Factors Influence Private Mortgage Rates?

Multiple factors determine the interest rate a private lender will offer on a mortgage:

Credit score – Borrowers with higher scores get lower rates. Those with poor credit pay more.

Down payment – Larger down payments equal lower rates since the loan amount borrowed is less.

Debt-to-income ratio – Lower DTI means lower risk. You’ll qualify for a better rate.

Loan type – Fixed rates are lower than adjustable rate mortgages (ARMs). ARMs start with lower teaser rates that later adjust based on an index.

Loan term – Shorter terms mean faster repayment. A 10-year private mortgage has a lower rate than a 30-year loan.

Collateral – Providing additional collateral besides the home may qualify you for a lower rate.

Relationship – Friends or family members providing the private mortgage might offer more favorable rates.

Credit enhancements – Adding a cosigner with better credit could help you qualify for a lower rate.

Rates you’re quoted also depend heavily on prevailing interest rates at the time. When underlying indexes like the prime rate or LIBOR increase due to Federal Reserve rate hikes, private mortgage rates will also trend upwards.

Common Fees Charged on Private Home Loans

Along with mortgage rates, you’ll also need to consider fees when obtaining a private mortgage. Be sure to factor in these costs when determining if a private loan works financially:

• Origination fee – Upfront fee equal to 1% to 5% of the loan amount to originate the mortgage. Paid at closing.

• Application fee – Typically ranges from $50 to $500 to apply for the private mortgage. Helps cover processing costs.

• Underwriting fee – Fee charged by lender for evaluating your eligibility and risk, around $300 on average. Adds to closing costs.

• Doc prep fees – Covers preparation of your loan documents and disclosures. Usually $100 to $400.

• Appraisal fee – Paid for home appraisal report required on most private mortgages, generally $300 to $500.

• Recording fees – Charged by local government to record your deed, around $50 per document.

• Title fees – Range from $500 to $1,500 to research any liens or claims on the home that could affect title.

• Credit report fee – $30 to $70 per person to order credit reports the lender will review.

While some lender fees are standard on most mortgages, private lenders have more leeway on the fees they charge. Be sure to understand all costs before committing to avoid surprises at closing.

How to Get the Best Private Mortgage Rate

As you seek a private mortgage, here are tips to follow that can help you secure the lowest rate possible:

• Have a down payment ready – Lenders reward lower risk borrowers who make down payments of at least 10% or 20% if possible.

• Check your credit – Good credit saves you money. Review credit reports and fix any errors before applying.

• Lower your debt – Pay down credit cards and other debts to reduce your DTI for better rates.

• Provide added collateral – Offering other assets as collateral besides the home may help reduce rates.

• Compare multiple lenders – Don’t go with the first private lender you find. Shop rates.

• Negotiate – Once you have one offer, use it to negotiate with other private lenders for a better deal.

• Lock your rate – Request a rate lock as soon as possible once approved so your rate doesn’t rise later.

• Shorten loan term – Opt for a faster repayment schedule if you can afford it. Rates are lower on 10 or 15-year mortgages.

Doing rate research, having your finances in order, and negotiating all give you leverage to secure the most attractive private mortgage rate.

Alternatives to High-Cost Private Mortgage Loans

Before pursuing a private mortgage, recognize that these loans are intended for borrowers unable to qualify through traditional lenders. The higher rates and fees reflect the increased risk taken on by private lenders.

If you don’t like the rates for private mortgages, consider alternatives:

Government-backed loans – FHA, USDA, and VA loans have more lenient qualifying terms than conventional mortgages.

Down payment assistance programs – Nonprofits and state/local groups offer help covering your down payment and closing costs to purchase a home.

Renovation financing – FHA 203(k) and HomeStyle loans combine a mortgage with funds for renovating a fixer-upper property.

Family gift – Ask relatives if they can gift you money for a down payment to avoid a private mortgage altogether.

Improve credit – Take time to increase your credit score before applying so you can qualify for a lower rate on a standard mortgage.

Rent instead – If you don’t qualify now, keep renting and saving until you can buy later with improved finances and credit.

While often a “last resort” for borrowers with limited options, private lenders fill an important role in the mortgage market. But due diligence is required to avoid overpaying and understand the risks involved with such financing.

What Are Some Private Mortgage Loan Rate Scams to Avoid?

Unfortunately, some predatory private lenders mislead borrowers about rates they can’t actually deliver. Be cautious of too-good-to-be-true advertised rates and fees. Here are red flags of predatory lending practices:

• Quoted rates that seem much lower than average private loan rates
• Pressure to sign loan documents without reading or understanding terms
• Being declined previously then suddenly approved for a lower rate
• Urging you to misstate income or assets to qualify for a better deal
• Mandated use of certain third parties like an appraiser, insurer or attorney
• High prepayment penalties making it hard to refinance later

Steer clear of private lenders engaging in dishonest or coercive tactics. Abide by the old saying “If it sounds too good to be true, it probably is.” Protect yourself by carefully reviewing all rates, terms and fine print before signing anything.

Partnering With a Reputable Private Mortgage Company

Finding a private lender you can trust is just as important as securing a favorable interest rate. Here are tips for choosing a credible lender:

• Verify proper licensing and authority to operate in your state
• Review the company’s BBB rating and online feedback
• Ask for referrals from professionals like real estate attorneys
• Check loan terms match what was advertised
• Read all paperwork thoroughly before signing
• Hire an attorney to review the mortgage agreement
• Don’t feel pressured or rushed through the process

Avoid private lenders who are evasive about fees, don’t answer your questions, or pressure you to lie on your application. Work only with private mortgage companies known for fair lending practices.

The Bottom Line

Private mortgage lenders let borrowers with unique situations or impaired credit access home financing that traditional banks may deny. But higher rates and fees are the tradeoff. Carefully comparing options among multiple private lending companies can help homebuyers find reasonable rates. Seeking professional guidance and reading the fine print are musts before signing any agreement.

With the right private mortgage loan provider, borrowers can secure financing to achieve homeownership goals while avoiding excessive rates and predatory lending practices. The higher costs underscore the importance of taking steps now like paying down debt and building stronger credit to qualify for lower rate financing in the future.