Hard money loans are a great way to get the necessary financing for real estate investments. If you don’t have a large amount of cash available or you don’t want to tie up 100% of your liquid funds, hard money loans provide an alternative method of funding that traditional loans typically won’t provide.
Everyone wants to know, though, what are the interest rates? Aren’t interest rates on hard money loans high?
That’s a myth that has been perpetuated in recent years. Is there interest? Of course, every borrower pays interest, but hard money loans are short-term loans that provide the immediate financing you need to close on an investment property, so the interest is often worth it and again, short-term.
Today, hard money loan rates range from 7 ½ to 15 percent. They also often have points or fees that offset the administrative costs. One point equals one percent of the loan amount. Hard money lenders charge 3 to 5 percent on most loans.
While it sounds high, remember what these loans do – they help you grow your real estate investment portfolio. Without the hard money loan, you either need all cash or to qualify for traditional financing, which is often much harder than hard money loans.
Hard money loans are a type of financing that can help you quickly access funds using real estate as collateral Unlike traditional bank loans that rely heavily on your credit score and debt-to-income ratio, hard money lenders focus more on the value of the property securing the loan This results in a much faster approval process, allowing you to close in days rather than weeks or months.
However, speed and flexibility come at a price. Hard money loans typically have much higher interest rates compared to conventional mortgages from banks. On average, you can expect to pay between 8% – 15% interest on a hard money loan. Rates are based primarily on the loan-to-value ratio, so the more equity you have in the property, the lower your rate may be.
In this comprehensive guide, we’ll explain everything you need to know about average hard money loan rates, including:
- What factors determine your hard money loan rate
- Typical interest rate ranges
- How hard money loan rates compare to traditional mortgages
- Tips for getting the best rate on a hard money loan
- Alternatives if you can’t afford high hard money rates
Let’s get started!
What Determines Your Hard Money Loan Rate?
With traditional mortgages, your credit score and debt-to-income ratio are major factors lenders use to qualify borrowers and determine rates. Hard money lenders take a different approach, basing rates primarily on the following factors:
Loan-to-Value (LTV) Ratio
This compares the amount of money you wish to borrow to the appraised value of the property. The lower the LTV the lower your rate will likely be. Hard money lenders prefer to lend no more than 65-75% LTV on most deals.
Property Type
Residential properties tend to qualify for lower rates than commercial real estate. Multi-family properties may also get better terms than single-family homes. Unique properties can potentially have higher rates.
Loan Term
Shorter loan terms (e.g. 6-12 months) qualify for lower rates than longer 2-5 year terms. Hard money loans are usually structured as short-term bridge financing.
Your Experience
Seasoned real estate investors with a track record of success may get better rate quotes than new investors using hard money for the first time.
Competition
In high-competition markets, hard money lenders may offer more competitive rate quotes to win new business. In slow markets, rates tend to be higher.
Loan Purpose
Hard money loans for buying or renovating investment properties may get better terms than primary residences or other purposes.
Typical Hard Money Loan Rates
While rates are largely determined on a case-by-case basis, here are some general guidelines on average hard money loan rates:
- Residential Hard Money Rates: Between 8% – 12% for LTVs up to 75%
- Commercial Hard Money Rates: Between 10% – 15% for LTVs up to 65%
- Fix and Flip Hard Money Rates: Around 8% – 12% for rehab projects
- New Construction Rates: As low as 7% for ground-up construction financing
The best hard money lenders will offer tiered rate structures based on key attributes like LTV, credit score, and loan purpose. Ask potential lenders if they offer rate discounts for favorable factors like low LTVs or high credit scores.
A few discount points can add up to huge interest savings, especially on larger hard money loans. Even a 1% reduction from 12% to 11% interest saves you $10,000 per year on a $1 million loan.
How Do Hard Money Rates Compare To Traditional Loans?
Compared to conventional mortgages from banks, hard money loans are much more expensive:
- As of February 2024, the average 30-year fixed mortgage rate was 6.5% according to Freddie Mac.
- The average 15-year fixed rate was 5.7%.
- For prime borrowers with great credit, some lenders offer rates as low as 5%.
Meanwhile, the average hard money loan will charge between 8% – 15% as mentioned previously.
This significant rate premium is the tradeoff for faster approvals and flexibility. Hard money fills a lending niche for borrowers who need funds quickly and can’t qualify for traditional financing.
If you can afford the higher payments, a hard money loan may be worth the convenience. But if cash flow is tight, the extra interest costs could become unmanageable.
Tips For Getting The Best Hard Money Loan Rate
While hard money rates are higher overall, here are some tips for making sure you get the lowest rate possible:
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Shop Around: Get quotes from multiple hard money lenders. Rates and fees can vary significantly.
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Ask About Discounts: See if lenders offer rate reductions for certain factors like low LTVs or high credit.
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Pay Points For A Lower Rate: Buying down the rate by paying points upfront can save substantially over the loan’s term.
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Minimize Loan Amount: The lower the LTV, the better the rate. Don’t borrow more than you need.
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Use A Broker: An experienced hard money broker can help you find the best lenders and negotiate favorable terms.
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Build A Relationship: Working with the same hard money lender on multiple deals may earn you loyalty discounts.
What If You Can’t Afford High Hard Money Rates?
If the rates from hard money lenders are too expensive for your project, consider these alternative financing options:
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FHA 203(k) Loan: Government-backed mortgages that allow you to finance repairs.
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HomeStyle Renovation Loan: Conventional mortgages for renovations from Fannie Mae.
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HELOC: Use a home equity line of credit to tap equity in an existing property.
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Crowdfunding: Platforms like PeerStreet allow investors to participate in hard money loans. This increases competition and drives down rates.
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Private/Seller Financing: See if the seller will provide a purchase-money mortgage with more affordable terms.
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Transactional Funding: Combining a secured business line of credit with automated borrowing can provide affordable short-term funds.
The Bottom Line
Hard money loans provide quick access to capital but charge higher interest rates to offset the risk. Aim for rates around 8-12% for residential and 10-15% for commercial deals by maximizing your down payment, improving your credit, enhancing your experience, developing relationships, and negotiating with multiple lenders. If you can’t afford high hard money rates, alternative financing options are available.
What Affects Your Hard Money Loans?
Just like a traditional loan, hard money lenders look at your risk of default. They want to know that you’re going to make good on the loan. Since requirements are different for hard money loans, it helps to know what lenders look for.
You’ll likely be able to borrow up to 75 percent of the home’s purchase price or after-repair value (depending on the lender). This means you need your own investment and the more money you have the higher your chances of approval become.
The more money you put down, the less risk the lender takes on. Take two borrowers for example – one borrow with a 50 percent deposit and another with a 25 percent deposit – they are both good borrowers, but the borrower with a 50 percent down payment poses a smaller risk of defaulting and may get better interest rates as a result.
Experience As A Real Estate Investor
Since you’re borrowing money to buy a home you aren’t going to live in, lenders take a big risk by granting you the funds. If you run into financial difficulty, your investment property payments are likely the first thing to go. You aren’t going to risk losing the house you live in, after all.
If you have experience as a real estate investor, it bodes well for lenders. They often give the investor’s background in real estate more stake than your credit history. If you’re looking to fix and flip, for example, lenders think of investors with experience as less of a risk than those doing it for the first time.
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FAQ
What is a typical hard money loan rate?
What are typical terms for a hard money loan?
What is the interest rate for a private money loan?
What are the hard money loans interest rates in 2024?
What is the average interest rate on a hard money loan?
Let’s compare hard money loan interest rates to traditional loan rates. In August 2023, the average rate on a conventional 30-year fixed-rate mortgage was 7.09%, according to Freddie Mac. Hard money loans have much higher interest rates, typically around 8% – 15%.
What is a hard money loan and how do they work?
A **hard money loan** is a type of loan that is secured by real property.It is often used as a short-term financing option for real estate transactions, with the lender generally being individuals or companies
Do hard money loans have high interest rates?
In particular, hard money loans are known for their very high interest rates. According to experts, hard money loans have interest rates from 7.5% to 15%, and they also usually have points and fees that offset the administrative costs of the loan. Not only do hard money loans have higher interest rates, but they also have shorter repayment periods.
How much does a hard money loan cost a year?
It’s often represented in yearly terms – meaning you pay that percentage every year the loan remains unpaid. If you have a hard money loan for $400,000 with an interest rate of 9%, you can expect to pay 9% of $400,000, or $36,000, in interest every year that you hold the loan.