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 unique form of financing that can be useful in certain situations, but they also come with some big drawbacks. One of the biggest considerations with hard money loans is the interest rate which is usually much higher than rates for conventional mortgages. In this comprehensive guide we’ll break down everything you need to know about hard loan interest rates.
What Are Hard Money Loans?
First, let’s make sure we’re all on the same page about what exactly hard money loans are. Hard money loans are a type of short-term financing backed by real estate as collateral.
They are issued by private lenders or investors rather than banks or traditional mortgage lenders The “hard” part refers to the real estate asset backing the loan.
Hard money loans are designed to be quick financing solutions for people who can’t qualify for conventional mortgages or need money fast. They are popular with real estate investors and developers
The upside is fast approvals and funding. The big downside is higher interest rates and costs.
Why Hard Money Loan Rates Are High
There are several key reasons why hard money loans come with such steep interest rates:
-
Higher Risk – Hard money loans are riskier for lenders than conventional mortgages. Borrowers often have poor credit or can’t document income in ways traditional lenders require. There is also risk tied to the collateral real estate. So higher rates help account for the increased potential for default.
-
Shorter Terms – Hard money loans typically have much shorter repayment terms of 1-3 years. Shorter loans mean less time to recoup interest payments, necessitating higher rates.
-
Less Regulation – Hard money lenders aren’t regulated like banks and traditional mortgage lenders. This allows them to set rates and terms they feel appropriately compensate their risk.
-
Costs of Capital – Hard money lenders often pay higher costs to obtain the capital they lend compared to banks with large deposits. These costs get passed on through higher rates.
-
Limited Competition – The hard money lending industry has fewer players than traditional lending. Less competition allows existing lenders to charge higher rates.
So in short, hard money lenders charge high rates to offset the unique risks and operating dynamics of this specialized lending niche.
Typical Hard Money Loan Rates
So exactly how high are hard money loan interest rates? Here are some typical ranges:
- Interest Rates: 8% – 15%
- Origination Fees: 2% – 5% of loan amount
- Other Closing Costs: Around $5,000 total
Here are some examples based on real world average loan amounts:
-
$200,000 Hard Money Loan
- Interest Rate: 12%
- Origination Fee: $4,000 (2% of loan amount)
- Total Closing Costs: $5,000
- Total Interest + Fees: $34,000+
-
$500,000 Hard Money Loan
- Interest Rate: 10%
- Origination Fee: $10,000 (2% of loan amount)
- Total Closing Costs: $5,000
- Total Interest + Fees: $55,000+
As you can see, the rates and fees add up quickly, especially compared to a conventional mortgage with today’s rates of 5-7% on average.
What Impacts Your Hard Money Loan Rate
Within the typical hard money rate ranges, your specific rate will depend on your individual loan factors:
-
Loan-to-Value (LTV) Ratio – Hard money lenders look at how much of the property’s value they are lending against. The lower the LTV, the lower the risk and rate.
-
Credit Score – Most lenders do lightly look at credit scores. Better scores can mean better rates.
-
Loan Term – Shorter loan terms mean higher rates. Longer terms spread costs over time.
-
Property Type – Loans on property like residential homes are seen as safer than commercial.
-
Experience with Lender – Having a relationship can result in better loan terms.
The importance of LTV ratio in hard money lending is worth emphasizing. Bringing more equity to the table can really help improve your rate.
State of the Market for Hard Money Loans
Broader economic conditions also influence the rates lenders need to charge on hard money loans. In a booming real estate market, lenders may offer lower rates, while a slowing housing market can push rates up.
The Federal Reserve’s monetary policy also has an effect. Rising interest rates across the economy filter through to higher rates on hard money loans as well.
Hard money lenders also tighten lending standards when they see the potential for higher defaults ahead. Fewer loans or higher equity requirements help account for a weaker outlook.
So in addition to your specific loan factors, the market backdrop can impact the rates lenders offer or if they lend at all. Keeping an eye on the big picture is helpful.
Common Hard Money Loan Terms
In addition to rates, hard money loans come with other terms and conditions borrowers need to be aware of:
- Payments – Often interest-only paid monthly
- Prepayment Penalties – Common due to short terms
- Balloon Payments – Most don’t fully amortize requiring lump-sum payment
- Lengthy Lock-In – Exit fees if refinancing before end of term
These terms help lenders maintain returns but can create headaches for borrowers. Make sure to read the fine print before committing.
Comparing Hard Money Loan Options
If you determine a hard money loan is your best or only financing option, make sure to shop around and compare offers from multiple potential lenders.
Reach out to local real estate investors for referrals. Online searches and real estate forums can also help identify reputable hard money lending companies.
When comparing options, look at:
- Interest rates
- Origination and other fees
- Loan-to-value requirements
- Eligible property types
- Loan terms
- Prepayment penalties
A small rate difference can save tens of thousands over the life of the loan. So take the time to make sure you are getting the best deal possible.
Alternatives to Hard Money Loans
Before pulling the trigger on a hard money loan, also make sure you’ve explored all alternatives:
Home Equity Loan – If you have sufficient equity built up in an existing home, a HELOC or home equity loan can provide access to funds for other investments at much better rates.
Family Loans – Asking friends or family to lend money for your real estate investment can be a good option. Even modest interest payments likely beat hard money loan costs.
Business Credit – Some real estate investors qualify for lower rate business lines of credit or term loans based on their firm rather than personal credit scores.
Crowdfunding – There are real estate crowdfunding platforms that allow you to raise funds from multiple investors at better rates.
Homestyle Renovation Mortgage – These FHA-insured mortgages can finance home construction and renovations for those who qualify.
Depending on your circumstances, one of these alternatives may provide the financing you need at lower cost.
When Hard Money Loans Can Make Sense
Given the high cost, in what situations can hard money loans be a good option? Here are some cases where the benefits outweigh the painful interest rates:
- Need financing fast to capitalize on a time-sensitive real estate investment opportunity
- Poor credit makes conventional lending difficult, if not impossible
- Investing in property types ineligible for traditional loans (e.g. commercial land)
- Need capital while in the process of selling another property
- Ability to complete a profitable real estate project fast enough to justify the costs
Hard money loans provide a financing solution when your situation doesn’t align with the constraints of conventional lending sources. But you need to go in with eyes wide open on the rates and with a solid plan to repay the loan quickly.
Weighing the Pros and Cons
Let’s recap the key benefits that make hard money loans useful in certain circumstances:
Pros:
- Fast approvals and funding
- Based on collateral value, not borrower credit
- Flexible terms aligned with the deal
- Ability to tap into real estate equity faster
And the biggest downsides to weigh:
Cons:
- Very high interest rates
- Large fees and closing costs
- Short repayment periods
- Risk of overspending on a bad investment
- Potential prepayment penalties
Having concrete plans to realize profits quickly or access lower-cost refinancing after using hard money loans to seize a time-sensitive opportunity can make the high rates and costs justifiable.
The Bottom Line
Hard money loans occupy a specialized niche in real estate finance. Their high interest rates and costs are exactly why they should not be entered into lightly. But when traditional mortgages aren’t an option, they can be the quickest way to take advantage of a promising real estate investment.
If you do need a hard money loan, make sure to get multiple quotes, understand the full costs,
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.
Hard Money Lenders Explained – How To Properly Find & Utilize Them
FAQ
What is a typical interest rate for a hard money loan?
What are typical terms for a hard money loan?
What are the hard money loans interest rates in 2024?
Are hard money lenders worth it?
Why is a hard money loan a risky loan?
High interest rates: Because the lender isn’t taking your credit score into account, the loan is considered riskier and earns a higher interest rate than other loan types. Lower loan-to-value (LTV): In a hard money loan, you may be able to borrow up to only 75% of the asset’s value.
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%.
Do you have to pay interest on a hard money loan?
Most hard money loans require interest payments during the term of the loan. However, well-qualified borrowers may not be required to make them during the loan term. Why are interest rates higher on hard money loans? Due to the risky nature of hard money loans, the interest rates are higher than traditional mortgages.
Why do hard money loans have high interest rates?
Lenders face significant risk with hard money loans because of the potential burden that can result if the borrower defaults, which is why these loans almost always come with high interest rates. Borrowers have a short repayment term and risk losing their property if they default. How Does a Hard Money Loan Work?