Hard Money Loan Rates in 2023: A Detailed Guide

Hard money loans are a unique form of financing that can be helpful for certain borrowers, especially real estate investors. But these loans come with higher interest rates, called hard money loan rates, that you need to factor into your plans. This guide will explain everything you need to know about current hard money loan rates and how to get the best rate when seeking this type of financing.

What Are Hard Money Loan Rates?

Hard money loans are provided by private lenders rather than banks They are secured by real estate and have short repayment terms of 1 year or less

The interest rates on hard money loans, called hard money loan rates, are typically much higher than rates for conventional mortgages from banks While rates for 30-year fixed mortgages average around 6% as of January 2023, hard money loan rates often fall between 8% and 15%

Some key factors that determine an individual borrower’s hard money loan rate include

• Loan-to-value (LTV) ratio – The percentage of the property’s value being borrowed. Lower LTVs get better rates.
• Credit score – Borrowers with higher scores get lower rates.
• Loan term – Shorter terms have lower rates.
• Competition – More lenders competing for your loan can mean a lower rate.

So while hard money loan rates are always higher than conventional mortgage rates, the exact rate you will pay depends on your specific loan scenario.

Why Are Hard Money Loan Rates So High?

There are a few key reasons why hard money lenders charge interest rates that are substantially higher than banks:

• Higher risk – Hard money loans are riskier for lenders than conventional mortgages. Borrowers usually have lower credit scores and the loans have short repayment terms. This increased risk gets passed on to borrowers in the form of higher rates.

• Lack of regulations – Hard money lenders are not bound by the same regulations as banks, so they have more flexibility in setting rates and fees. There are fewer protections for borrowers.

• Smaller scale – Most hard money lenders are smaller operations without the economies of scale of large banks. Their overhead costs per loan are higher.

• Profit motivation – Hard money lending is fundamentally a for-profit enterprise. While banks aim for reasonable profits, hard money lenders maximize profits.

So in exchange for quick and easy financing, hard money borrowers pay steep rates. But wise planning can help minimize those rates.

Hard Money Loan Rates vs. LTV Ratio

One of the most important factors that determines your specific hard money loan rate is the loan-to-value (LTV) ratio – the percentage of a property’s value that you want to borrow.

Hard money lenders offer better rates for lower LTVs because that means less risk for them. Here are some examples of how LTV impacts rates based on current industry averages:

• 50% LTV – Around 8% rate
• 65% LTV – Around 10% rate
• 75% LTV – Around 12% rate
• 85% LTV – Around 15% rate

The best way to get the lowest rate is to put down as much as you can afford, keeping the LTV ratio on the lower side.

7 Tips for Getting the Best Hard Money Loan Rate

While hard money loan rates are always high, here are some tips that can potentially help you get the lowest possible rate for your unique situation:

1. Shop around – Get quotes from multiple lenders to find the best deal. Rates and fees can vary widely.

2. Ask for discounts – See if lenders will shave some points off for things like a lower LTV or having a relationship with them.

3. Offer collateral – Providing additional collateral like stocks or Savings bonds beyond the real estate may lower rates.

4. Get referrals – You may get better initial quotes from lenders if you come via referral from a satisfied previous borrower.

5. Pay points – Just like with mortgages, paying points upfront can lower the interest rate. Each point is usually 1% of the loan amount.

6. Shorten the term – Opt for a 6-month loan rather than a 1-year loan if you can repay faster. Shorter terms get better rates.

7. Improve your credit – While credit scores aren’t as important for hard money loans, boosting yours before applying can help a little.

Doing your homework by researching lenders and negotiating the best deal can potentially save you thousands in interest charges.

Hard Money Loan Rates Outlook for 2023

Most experts expect hard money loan rates to remain high but fairly steady in 2023. Here are some key factors that will influence rates this year:

• The Federal Reserve raised its benchmark rate several times in 2022 and may continue doing so in 2023. More increases could nudge hard money rates upward.

• However, competition among lenders remains strong, which creates incentive to keep rates low to attract borrowers.

• Real estate demand is expected to cool somewhat but remain decent, supporting lending activity.

• Default rates on hard money loans have been very low, emboldening lenders to keep offering these products.

Barring a full-on economic crisis, hard money lenders have little reason to hike rates dramatically higher in 2023. But some incremental increases are likely.

Are Hard Money Loan Rates Negotiable?

Absolutely – hard money loan rates are always negotiable depending on your leverage as a borrower. Here are some key strategies to negotiate the best rate:

• Get multiple offers – With several rate quotes in hand, you can use the lowest one as leverage with other lenders.

• Ask for rate reductions – Clearly communicate that you’re speaking with other lenders and see if it prompts rate decreases.

• Offer incentives – Providing things like higher equity, collateral, or points can give lenders incentive to reduce rates.

• Limit costs – Try keeping some closing costs lower in exchange for a better rate.

• Explain your reliability – Convince the lender they can depend on you to repay the loan on time.

• Take a shorter term – Ask if taking a 6-month loan rather than 12 months can get you a discount.

With the right strategy, you can potentially shave at least 1-2 percentage points off the initial rate a hard money lender offers.

Is a Hard Money Loan Worth the High Rate?

Despite the steep rates, hard money loans remain popular because they fill a useful niche. For real estate investors who can rehab and sell a property quickly, the benefit of fast funding outweighs the higher cost.

These loans are also sometimes the only option for borrowers with less-than-perfect credit. Paying a 12% or 13% rate beats not being able to buy or refinance at all.

But hardship can ensue if you accept too high of a rate or cannot repay the loan swiftly. Understanding exactly how hard money loan rates work and negotiating the best deal possible is crucial to success with this financing option.

Hard Money Loan Rates Over Time

Looking at historical trends, hard money loan rates have fluctuated moderately over the past several years while remaining well above conventional mortgage rates.

Here are the average top rates over the past 5 years according to leading hard money lender Lima One Capital:

• 2018 – 11.95%
• 2019 – 12.69%
• 2020 – 11.62%
• 2021 – 11.36%
• 2022 – 12.03%

So while there is some minor variation, hard money rates have largely stayed within a few percentage points of 12% during this stable period for real estate.

If we enter a period of economic uncertainty or distress, rates could rise more significantly as lenders compensate for increased lending risks. But for now, the hard money lending space remains robust and competitive, keeping rates from spiraling upward.

The Bottom Line

Hard money loans fill an important niche, providing fast financing for real estate investors and others not well served by conventional lenders. But these loans come at a price in the form of high interest rates.

While hard money loan rates are always higher than mortgages from banks, better planning and negotiation can potentially help you get the lowest rate for your specific loan scenario. Understanding how rates are set and shopping around is crucial to saving money.