Current Hard Money Loan Rates in 2023

Hard money loans are a type of financing used primarily by real estate investors and developers. As a real estate investor myself I’m often asked what the current rates are for these types of loans. So in this article I’ll provide an overview of hard money lending and break down the range of interest rates you can expect to see in 2023.

What are Hard Money Loans?

Also known as bridge loans or private money loans, hard money loans are short-term, asset-based loans that are secured by real estate. They are useful for investors who want to purchase or rehabilitate a property but can’t obtain traditional bank financing.

Hard money loans are usually based on the property’s potential value rather than the borrower’s creditworthiness, This allows borrowers who may not qualify for a conventional bank loan to access funding quickly,

The loans are considered “hard money” because the lender is typically an individual investor, private lending company, or real estate fund rather than an institutional bank The loans carry higher interest rates and fees to compensate the lender for the increased risk.

Why Interest Rates Are Higher for Hard Money

There are several reasons why hard money loans have higher interest rates than conventional mortgages:

• Shorter loan terms – Hard money loans are shorter in duration, usually 6 months to 3 years. Banks spread their profits over 30 years for a mortgage. Hard money lenders have less time to earn a return.

• Riskier borrowers – Borrowers often have credit challenges, or are investors rather than owner-occupants. This increases the chance of default.

• Less stringent underwriting – Hard money lenders focus more on the property’s potential value rather than the borrower’s finances. This can be riskier.

• Unique projects – The properties may require heavy renovation or have other complicating factors that banks shy away from.

• Faster process – Hard money lenders can fund loans in days rather than the weeks or months banks take. Speed costs more.

• ** Relationship-driven** – Hard money lending is based on personal relationships and experience. This provides access to deals but limits scale and increases costs.

So in exchange for fast funding, flexibility, and less stringent requirements, borrowers pay higher interest rates and costs. But for the right project, it can be worth it.

Current Rates for Hard Money Loans

Hard money loan rates can vary significantly based on the specific situation. But in general, here are the prevailing rates I’m seeing in 2023:

• 1st Position Loans – 9.5% to 12% interest rate

• 2nd Position Loans – 12% to 14%

• Fix & Flip Loans – 11% to 13%

• New Construction Loans – 10% to 12%

• Commercial Loans – 8% to 12%

There can be additional points, fees, and closing costs between 3% to 5% of the loan amount. So an $800,000 hard money loan at 11% interest with 3 points would equal $88,000 in first year costs.

Many factors impact interest rates beyond just loan position and property type, including:

• Loan-to-value ratio (LTV)
• Loan amount
• Credit score
• Experience of borrower
• Location of property
• Condition of property
• Loan term and amortization
• Prepayment terms
• Level of rehabilitation required

When Hard Money Loans Make Sense

Despite the higher rates, there are many situations where hard money loans are the right financing solution such as:

• Purchasing a fixer-upper investment property
• Funding ground-up construction
• Closing quickly on a time-sensitive acquisition
• Bridging the gap to obtain longer-term financing
• Securing a property when traditional financing falls through
• Tapping into equity when cash is needed quickly

Hard money offers speed and flexibility when you need it most. For experienced investors, the higher rates are a trade-off for access to deals and the ability to move quickly.

How to Get the Best Hard Money Rates

As a borrower, there are several things you can do to ensure you get the most favorable hard money loan rates:

• Seek quotes from multiple lenders to compare options
• Provide as much detail as possible about the project
• Highlight your real estate investing experience
• Put down a larger down payment or pay for some costs upfront to reduce LTV
• Offer a shorter loan term so the lender’s money is tied up less time
• Build a relationship with a lender through repeat business
• Present a clear and low-risk exit strategy for repaying the loan

Even a quarter to half percentage point savings in rates can mean thousands in interest cost savings over the life of the loan. So shopping around is wise.

The Bottom Line

Hard money lending provides an indispensable source of financing for real estate investors and developers. And while the rates are higher than conventional loans, they provide access to capital in situations where other options may not be possible.

Current hard money loan rates in 2023 range from 8% on the low end for commercial loans with strong borrowers, to 14% on the high end for riskier 2nd position loans. There are many factors that impact pricing. So being aware of the current rate environment, and taking steps to improve your position as a borrower, are key to getting the best rate possible.

The right hard money loan can unlock equity, allow you to tap into deals, and provide bridge financing to ultimately transition into traditional lower-cost loans. Understanding the true cost of capital, and having realistic expectations, will lead to success when using these specialized types of financings.