Hard Money Refinance Loans: A Guide for Real Estate Investors

Hard money refinance loans allow real estate investors to tap into their property’s equity and take cash out for other investments or expenses. These loans are secured by the property itself and don’t require extensive documentation like a conventional refinance If you need fast financing to take advantage of a new opportunity or cover unexpected costs, a hard money refinance could be the solution

What is a Hard Money Refinance?

A hard money refinance replaces your existing mortgage with a new loan from a private lender The loan is secured using the subject property as collateral, so it doesn’t rely on your credit score or debt-to-income ratio Instead, the lender focuses on the property’s value and potential rental income.

Hard money lenders are usually individuals or companies with cash on hand to fund loans. They offer higher interest rates and fees than banks, but the underwriting process is much quicker and eligibility requirements are flexible.

Key Features of Hard Money Refinance Loans

Here are some key features that set hard money refinance loans apart from conventional refinances:

• Fast funding – Hard money refinances can close in as little as 10 days, while conventional refinances take 30-45 days on average. Speed is essential for real estate investors who need to move quickly.

• Cash-out options – Borrow up to 85% of your property’s appraised value and take cash out for other uses after paying off your existing mortgage. This flexibility isn’t available with all conventional refinances.

• Alternative eligibility – Hard money lenders look at the deal itself rather than your personal finances. Lower credit scores and higher debt-to-income ratios may be acceptable.

• Short terms – Hard money refinance terms are usually under 36 months. This works well for fix-and-flip projects but means you’ll need to refinance again or sell the property soon.

• Higher costs – Interest rates for hard money loans typically start around 7-12% and require 2-5 points upfront. The speed and flexibility come at a price.

When Does a Hard Money Refinance Make Sense?

A hard money refinance is optimal when you need capital quickly for a new real estate investment opportunity and can’t get approved for a cash-out conventional refinance in time. Common situations where investors use these loans include:

• Refinancing a fix-and-flip property once repairs are complete to repay your rehab loan and take cash-out for the next project

• Pulling equity out of a rental property to make a down payment on another investment property

• Obtaining capital to cover emergency expenses when cash is tied up in other assets

• Refinancing a commercial building when traditional lenders decline due to property type or location

In essence, hard money refinancing works if you need flexible underwriting, fast funding, or significant cash out that isn’t available from regular lenders.

How Do Hard Money Refinances Work?

The process of securing a hard money refinance is much simpler and quicker than a conventional refinance. Here are the basic steps:

1. Find a lender – Many hard money lenders operate locally, but larger companies like Lima One Capital, SuRo Capital, and Broadmark Capital provide loans nationwide.

2. Submit a loan application – The lender will request basic information on the property, your desired loan amount and intended use of funds. Many accept online applications for convenience.

3. Property appraisal – The lender will order a quick appraisal, usually within 1 week, to establish current property value.

4. Verify property condition – A site inspection confirms the property is acceptable collateral for the loan. Photos or video tours may suffice.

5. Receive a term sheet – Within a few days, the lender provides a term sheet detailing the loan amount, fees, interest rate, payment schedule, and other terms.

6. Sign documents and close – Once the term sheet is signed, the lender handles title work and lien payoffs. Closing often happens within 10-14 days.

7. Receive funding – After closing, the lender disburses the loan proceeds directly to you. Some lenders fund simultaneously with closing.

The entire process usually takes 2-3 weeks from application to funding. Conventional refinances require 30-45 days at minimum. The accelerated timeline makes hard money refinancing ideal when you need capital ASAP.

What are the Requirements for Hard Money Refinancing?

Hard money lenders have more flexible underwriting standards than conventional lenders. However, you’ll still need to meet certain requirements:

• Equity – Most lenders require at least 30% equity built up in the property to approve a refinance. Some may accept 20-25% equity with a larger fee.

• Property type – Hard money lenders accept non-owner-occupied residential and commercial properties. Primary residences don’t qualify.

• Property condition – The property must be habitable and adequately maintained. Dilapidated or fire-damaged properties won’t be approved.

• Loan-to-value ratio – LTVs up to 75% are common. You can receive higher cash-out with a lower LTV.

• Transactional experience – Most lenders want to see you’ve purchased investment properties before. First-time investors may not qualify.

• Cash reserves – Expect to show 2-6 months of mortgage payments in cash reserves as a cushion for emergencies.

Your personal credit score and debt-to-income ratio are less important if the deal makes sense on paper. Still, expect lenders to run a credit check and review your financial statements.

Pros and Cons of Hard Money Refinancing

Hard money refinancing provides quick access to your equity, but the high cost and stringent terms aren’t ideal for every real estate investor. Consider these pros and cons:

Pros

• Funding in as little as 10 days
• Cash-out up to 75-85% LTV
• Alternative qualification standards
• No home appraisal required
• Lower documentation

Cons

• Interest rates from 7% to 15%
• Upfront points of 2% to 5%
• Short repayment terms under 3 years
• Refinancing costs paid again when term ends
• Large prepayment penalties

The speed and flexibility come at a price – hard money refinances are considerably more expensive than conventional mortgages. Make sure the benefits outweigh the higher rates and fees for your situation.

What are Typical Costs for a Hard Money Refinance?

You can expect to pay the following costs when refinancing with a hard money loan:

• Interest rate – Usually around 9-12% for a 12-month term, but can range from 7% to 15%+. The higher your LTV, the higher the rate.

• Points – Upfront fee of 2 to 5 points. On a $200,000 loan, 5 points equals $10,000. Helps the lender hedge against risk.

• Origination fee – 1% to 3% of the loan amount charged by the lender to process the loan.

• Title insurance and escrow fees – $500 to $2,000 to cover title work, recording, and escrow.

• Prepayment penalty – Expect to pay 3-6 months of interest if you refinance or sell before the term ends.

Total costs on a $200,000 refinance

• Interest rate: 10%
• Points: 3 points ($6,000)
• Origination fee: 2% ($4,000)
• Title and escrow fees: $1,000

Total upfront costs = $11,000

Be sure to calculate the all-in costs to see if the numbers still make sense for your deal.

7 Tips for Securing a Hard Money Refinance

Follow these tips to ensure you get the best terms on a hard money refinance:

1. Shop multiple lenders – Compare interest rates, points, and fees to find the best deal. Don’t take the first offer.

2. Highlight positive property attributes – Emphasize upgrades, strong location, and stable tenants to boost appraised value.

3. Get a realistic after-repair value – For fix-and-flips, estimate ARV conservatively so the appraisal matches.

4. Offer personal guarantee – Some lenders may waive this if you have experience and assets.

5. Keep loan term short – Opt for 6-12 months to get better rates and fees. Have an exit strategy.

6. Pay for a rapid appraisal – Ask the lender if you can pay more to expedite the appraisal process.

7. Have documents ready – Gather required paperwork early so you can submit it quickly.