How to Calculate Hard Money Loan Payments

Hard money loans can be a great financing option for real estate investors and flippers. But before taking one out, it’s important to understand how to calculate the payments. In this article I’ll explain in simple terms how to calculate your monthly payments for a hard money loan.

What is a Hard Money Loan?

A hard money loan is a short-term asset-based loan usually used by real estate investors and flippers. Hard money lenders provide these loans based on the value of the underlying asset (like a rehab property) rather than the borrower’s creditworthiness.

These loans come with higher interest rates and costs compared to conventional mortgages. But the underwriting is much faster, usually 7-10 days. This speed makes them attractive for real estate investors who need to move quickly.

Hard Money Loan Payment Structure

Hard money loans have a different payment structure than conventional mortgages. Here are the key components:

• Upfront fees – Expect to pay 2-5% of the loan amount in origination, application, and other upfront fees.

• Interest-only payments – Your monthly payments only cover the interest charges, not the principal.

• Short term – Usually 6 months to 3 years.

• Balloon payment – The remaining principal balance is due as a lump sum at maturity.

This structure benefits borrowers who need fast capital and plan to pay back the loan quickly through a sale or refinance. But it also comes with risks if you can’t repay the balloon payment.

How to Calculate Hard Money Loan Payments

Follow these steps to calculate your potential hard money loan payment:

1. Determine the loan amount

   Take the purchase price minus your down payment. Hard money LTVs often range from 60-75%.

2. Find the interest rate

   Rates typically range from 10-14% for a hard money loan.

3. Identify fees

   Ask the lender to disclose all fees upfront. Origination, application, and other fees often total 2-5%.

4. Determine the term

   Hard money terms run 6 months to 3 years. Shorter is better to limit interest costs.

5. Calculate the monthly interest payment

   Take the loan amount x interest rate / 12 months. For example, $100,000 x 12% / 12 months = $1,000.

6. Add upfront fees

   Divide total fees by the number of months in the term and add to the monthly payment.

7. Review amortization schedule

   Ask the lender for a full amortization schedule detailing the balloon payment amount and date.

Let’s look at an example:

• Purchase Price: $200,000
• Down Payment: 20% ($40,000)
• Loan Amount: $160,000
• Interest Rate: 12%
• Term: 1 year
• Fees: 4% of loan amount ($6,400)

Monthly interest payment = $160,000 x 12% / 12 months = $1,600

Add fees: $6,400 / 12 months = $533

Total monthly payment = $1,600 + $533 = $2,133

This example excludes the balloon payment that would be required at maturity.

Using an online calculator can simplify the calculations. But following these steps will help you understand the key factors that drive hard money loan payments.

When Do Hard Money Loan Payments Make Sense?

Hard money loans fill a niche for real estate investors who need funds quickly. But are the payments worth it?

Here are a few examples when accepting higher hard money payments can make sense:

• Finding a below-market deal on a distressed property that you can quickly rehab and sell or refinance at a profit.

• Needing a short-term bridge loan to purchase before locking in long-term financing.

• Securing a great investment property that doesn’t qualify for a conventional loan.

• Flipping houses when speed is critical to getting properties, renovating, and reselling quickly.

However, the higher payments and fees mean hard money loans are riskier than conventional financing. Work closely with your lender and have an exit strategy lined up.

Tips for Lowering Hard Money Loan Payments

A few strategies could potentially lower your payments on a hard money loan:

• Shop around for the best rates and lowest fees. Compare options from multiple hard money lenders.

• Seek a lower LTV if you have a larger down payment – this lowers the principal and interest payment.

• Ask if you can pay points for a lower interest rate.

• Request a shorter term which reduces overall interest costs.

• Try to negotiate the fees or add them to the loan balance rather than paying upfront.

• Make extra principal payments if allowed to pay down the balance faster.

• Look into alternative loan options like private lenders that may have lower costs.

The Bottom Line

Hard money loans can be more expensive than conventional financing but provide speed and flexibility for real estate deals. When used strategically, the higher payments and costs can be worth it.

Following the steps above will help you accurately calculate monthly payments for a hard money loan. Compare options to find the best rates and terms for your needs. And have a solid repayment plan in place before signing any paperwork. With the right property and exit strategy, a hard money loan can be a beneficial tool for real estate investors.