Hard money loans have become an increasingly popular financing option for real estate investors especially those involved in fix-and-flip projects or new construction. Unlike conventional mortgages from banks and credit unions hard money loans offer quicker access to capital with less stringent qualification requirements.
However, hard money loans come with their own set of pros and cons that investors should fully understand before moving forward. One of the most important factors to grasp is how hard money loan monthly payments work.
How Do Hard Money Loan Payments Differ from Traditional Loans?
The biggest difference lies in the amortization structure. With a conventional 30-year mortgage from a bank your monthly payments cover both interest and principal. This gradually pays down your loan balance over the full term.
Hard money loans take a different approach – requiring interest-only payments each month. You are only paying the interest that accrues on the loan, not making a dent in the original principal balance.
For example:
- Loan amount: $200,000
- Interest rate: 10%
- Loan term: 12 months
Your monthly hard money loan payment would be:
$200,000 x 10% interest / 12 months = $1,666.67
After 12 payments of $1,666.67, the entire $200,000 loan balance remains and must be paid off as a balloon payment.
This structure allows real estate investors to conserve capital for renovations and carrying costs during their project. But it also means they must find a way to pay off the full balance when the loan matures.
When Do You Owe the Full Loan Balance?
With interest-only payments, hard money lenders expect the entire loan balance to be repaid at the end of the set term, usually 6 months to 3 years. This end-of-term payment is known as a balloon payment.
Returning to our example above, the full $200,000 loan balance would be due after 12 months. As a fix-and-flip investor, you would plan to sell the rehabbed property and use the profits to cover this balloon payment.
For new construction or long-term projects, the exit strategy may involve refinancing into a conventional loan rather than selling immediately. Either way, you must find capital to pay off the hard money lender.
Can You Make Principal Payments?
Some hard money lenders only require interest-only payments, while others allow borrowers to pay down principal if they choose. Paying some principal each month will reduce your final balloon payment.
For example, if you pay an extra $500 per month on a $200,000 loan at 10% interest, your balance after 12 months would be approximately $188,000 instead of the full $200,000.
Check with your lender to see if principal paydowns are allowed. Even if so, many real estate investors opt for interest-only to maximize capital available for renovations.
What Happens If You Default on the Balloon Payment?
Failing to pay off the full loan balance at maturity puts the hard money lender at risk. As a result, defaulting on your balloon payment has serious consequences.
In most cases, the lender will move to foreclose on the property that was used as collateral for the loan. They can then sell the asset to recoup their capital.
Before originating a hard money loan, the lender has a third-party appraiser ensure there is sufficient equity in the property. This protects their investment if forced into foreclosure.
Can a Hard Money Loan Be Extended or Refinanced?
If you realize you won’t be able to pay off the balloon payment on time, you may be able to negotiate an extension with your lender. However, they will likely charge high fees and a higher interest rate for this flexibility.
A better option is refinancing into a conventional loan before your term expires. Work with a mortgage broker to find a competitive product that matches your needs.
With proper planning, you can have a new loan in place to pay off the hard money lender on time. Just be aware that banks will impose stricter qualification standards based on your income, credit score and existing assets.
Key Takeaways on Hard Money Loan Payments
-
Monthly payments only cover accrued interest, leaving the original principal balance due as a balloon payment when the loan matures.
-
The balloon payment timeline is usually tied to the expected project completion and sale of the property.
-
Allowing interest-only payments gives the borrower more capital for renovations but adds risk of defaulting on the balloon payment.
-
Paying down principal each month can help reduce the size of your balloon payment.
-
Work with a mortgage broker at least 90 days before maturity to secure refinancing if you won’t have capital to pay off the hard money lender.
Understanding how hard money loan payments work is critical when assessing your financing options as a real estate investor. Be sure to choose an experienced lender who can structure terms to match your rehab timeline and projected exit strategy.
Hard Money Calculator ResultsNet Profit (
A hard money loan is a short term real estate loan used by house flippers to purchase and renovate properties. A hard money lender provides the capital the investor needs to purchase the property, complete high ROI renovations, and thereby increase the after repair value of the home.
Crucially, the real estate investor is required to pay back the full loan amount at the end of the loan terms (usually 12-24 months). Usually, the funds from the sale of the house are used to pay back the full loan amount.
In most cases, hard money lenders will provide 70 to 90% of the funds needed to complete the project, meaning that the house flipper is responsible for covering the shortfall.
For the process to work successfully, the after repair value of the property must be substantially more than the original purchase price.
In addition, it’s also worth clarifying that there several different types of hard money loans, including:
Reputable Hard Money Lenders like New Silver offer interest-only repayment terms. For example, if you were offered a $200,000 hard money loan, with a 10% interest rate, your monthly payment would work out to $1666.66. Here’s how it works:
- Amount Borrowed: $200,000
- Annual Interest Rate: 10%
- Monthly Repayment: Amount Borrowed * Annual Interest Rate / 12
- Monthly Repayment: $200,000 * 10% / 12
- Monthly Payments: $1666.66
In other words, your monthly payment only covers the interest portion of the capital that was borrowed. However, you are required to pay back all the capital that was borrowed when the loan expires.
It helps to think of it as a balloon payment, but instead of paying a portion of the capital back, your balloon payment covers the full amount borrowed.
Hard Money Loan Monthly Payments only cover the interest portion of the loan. This means that with each monthly payment, you don’t make a dent in the total capital that was borrowed. Instead, the expectation is that you will pay back 100% of the capital, at the end of the loan‘s life cycle.
For example, let’s imagine you applied for hard money financing to the value of $150,000, with an interest rate of 10% and a loan term of 6 months. In this case you would pay:
- Month 1: $1250 ($150,000 * 10% / 12)
- Month 2: $1250
- Month 3: $1250
- Month 4: $1250
- Month 5: $1250
- Month 6: $1250
- End of the loan: $150,000
As you can see from the example above, you only pay off the interest portion of the loan each month. You repay the full capital amount when the loan expires, using the funds from the sale of the house that was flipped to do so.
Apart from a higher interest rate, this is one of the main ways in which a hard money loan differs from a traditional loan. With a traditional lender, the monthly payment is a mixture of the interest owed and the outstanding capital amount. This is what allows the borrower to pay off their entire mortgage over time. The borrower basically chips away at the capital month after month and year after year. When the loan comes to an end, there is no more capital to pay off.
This traditional financing approach doesn’t work for house flippers, because of the cash flow challenges that it would introduce. Conversely hard money lending provides a short term loan solution for property investors that need to successfully execute a real estate deal.
Hard Money Loan Rates typically range from 7.5% to 15%, depending on the hard money loan lender that you choose, the borrower‘s creditworthiness, and the amount of house flipping experience that the investor has.
In most cases, these three attributes wiill have a massive impact on the final rate that is offered to you. Generally speaking, the better your credit history and the more house flipping experience you have, the lower the loan rate will be.
In most cases, the house flipper is required to put down between 10% and 20% of the project cost. For example, if the hard money lender covers 85% of the project cost, the investor would need to cover the shortfall of 15%.
On average, borrowers need a 600 credit score. Compare that to the average 680 – 700 credit score traditional lenders require and it’s easy to see why hard money loans are a great option.
If you plan to keep the home and rent it out, you may find credit score requirements to be a little higher – usually around 680 only because the risk is higher.
On a broad level, hard money loans and bridge loans are very similar. However, bridge loans can be offered by traditional finance institutions, and they can be used to fund a wider range of purchases (rather than just real estate).
While the interest rates on traditional loans are typically lower, the approval process is far more stringent and time-consuming. This can be a dealbreaker when you spot an opportunity for a fix and flip. In most cases, you need to move swiftly in order to capture the deal. That is why a hard money lender like New Silver can be so useful to investors. Effectively you get:
- Flexible loan terms
- Easy loan applications
- Less stringent financial requirements
- Speedy approval and closing
- Instant proof of funds
The origination fee is an additional cost associated with hard money loans. It usually ranges from 1-3% of the loan, but this is ultimately up to the lender that you choose. It is the expense that the lender charges the borrower to cover all the costs associated with initializing the loan.
So, if your loan amount is $200,000 and the origination fee is 1%, that would result in a cost of $2,000. This cost is built-in as a percentage in our hard money calculator. You can change it, using the dial in the calculator.
Workout the potential profitability of an investment property with our Rental Property Calculator.
To figure out the ROI of a fix and flip, you need a comprehensive Hard Money Calculator. It allows you to workout the monthly repayments, analyze net operating income, calculate the return on investment when you sell the property.
Each step in the Buy, Rehab, Rent, Refinance, Repeat (BRRRR) requires detailed analysis before you proceed with the deal. Fortunately our BRRRR Calculator breaks the process down into simple phases that are pretty easy to understand.
Quickly assess the After-Repair Value of a property with our user friendly ARV Calculator.
Cap Rate is a simple formula that helps investors work out how profitable an investment property is likely to be. Our Capitalization Rate Calculator makes this easy to do, in very little time.
FlipScout is a free search engine for property flippers. It lets you find properties that you can earn the highest return on when completing a fix and flip or fix-to-rent project. You can learn more about FlipScout here.
Quickly calculate the Net Profit, ROI and Return on Equity when flipping a house. This house flipping calculator makes it easy to see how profitability is impacted by the loan amount, interest rate and turnaround time.
Hard Money Loans Across The US U.S. States
How To Get A Hard Money Loan In 2024
FAQ
What are the payment terms on a hard money loan?
How to calculate payment on hard money loan?
What is a typical hard money loan rate?
How are hard money loans paid back?