What Is The Average Hard Money Loan Interest Rate?
Hard money loans have a variety of advantages — they can be approved very quickly, and they are incredibly flexible. Compared to a traditional mortgage loan, hard money loans can be approved much faster, and in competitive seller’s markets that result from the housing bubble caused by the pandemic, hard money loans make real estate investors instantly competitive
They are known for their speed, flexibility, and convenience.
What is a hard money loan?
Essentially, hard money loans are a terrific form of alternative financing. Hard money loans are based on the after repair value of a property, and are especially advantageous for real estate investments like fix and flips, long-term rentals, construction projects, and repairs of distressed properties. Real estate investors use hard money loans for house flipping in particular.
They are not based on the financial standing of the applicant. Despite hard money loans requiring minimum credit scores, they use the property as collateral, and the approval process is a lot less stringent than the approval process for a traditional mortgage loan. A default on a hard money loan is very different than a default on a mortgage: a lender can take possession of a property and sell it very quickly. Sometimes, the hard money lender can make a significant profit.
But it is an added risk for the lender. Hard money loans are known as last resort loans for a reason. Sometimes, borrowers seek out hard money loans when they have been rejected from traditional mortgage loans. They have very unforgiving rates since the lender takes on added risk. This risk goes along with the potentially much higher reward, but it’s important to keep these risks into account.
It’s also a myth that credit score does not matter for hard money loans — while hard money loans may not require a high credit score to get approved, a good credit score certainly does not hurt.
In particular, hard money loans are known for their very high interest rates. According to New Silver, hard money loans have interest rates from 7.5% to 15%, and they also usually have points and fees that offset the administrative costs of the loan.
Not only do hard money loans have higher interest rates, but they also have shorter repayment periods. Instead of needing to be paid back within 15 to 30 years like a mortgage, hard money loans need to be paid off within more or less a year. These are averages, but it’s important to note that like traditional financing, hard money loans have different interest rates for different borrowers and investors.
Here are some of the factors that matter for the interest rates of hard money loans.
The down payment of the borrower
Famously, hard money loans have lower loan-to-value (LTV) ratios than traditional mortgage loans. The average hard money loan has an LTV ratio between 60 to 80%, while most commercial mortgages from banks have rate of 80% or more. This means borrowers who use hard money loans have to put down bigger down payments.
Usually, the bigger the down payment, the better the interest rate of the loan. A bigger down payment means more of a commitment from the borrower, and also lessens the likelihood of a real estate investor defaulting on a hard money loan.
To hard money lenders, the down payment of the borrower is their investment. Also, lenders often require different down payments for different investments — they require a down payment of 10–20% for a residential property loan and 30–40% for a commercial property.
There are some hard money lenders who charge no down payment whatsoever — but there are often other costs. These costs include very high-interest rates and other fees, and unforgiving payment schedules.
Also, a good credit score proves the buyer might not default on their hard money loans. While a bad credit score may not deny you getting a hard money loan, it does impact your interest rate. In particular, new investors’ credit scores and financial histories are important — since many hard money lenders rely on the investment history of the borrower, other hard money lenders rely on credit score, money in the bank, and amount of debt for the amount of debt a borrower incurs.
While the popular convention is most hard money lenders don’t care about credit, the fact is new investors in particular have to be very conscientious about their credit scores.
The experience of the borrower
Another factor that impacts the rate of a hard money loan is the experience of a borrower. Typically, borrowers with track records of successful investments get better interest rates from lenders. The more experienced the borrower, the more reliable they are to pay off hard money loans (from a lender’s perspective).
The biggest factor for a hard money lender is the risk of default, and hard money lenders want to avoid defaulting at all costs. Many hard money lenders won’t even lend to new investors since they might only work with real estate investors with a couple of successful investments. There is just that much risk for a lender working with a new investor.
The location and type of the property
There are properties hard money lenders consider “low risk,” like a residential property. And there are also properties considered “high risk,” like farms. The location of a hard money loan matters and lenders might prioritize some investment properties over others.
Other factors that influence hard money loans include the amount of a requested loan. Typically, a hard money loan of $100,000 is going to be more than a hard money loan of $50,000 because the lender is taking on more risk.
The location of the property also matters depending on whether the lender is in a mortgage state or deed of trust state. A deed of trust state means a lender can foreclose in an auction-like sale. A mortgage state means hard money lenders have to go through the traditional foreclosure process if a borrower defaults, much like banks.
Interest rates are typically lower in deed of trust states than they are in mortgage states, which is not within the borrower’s control, but one factor to take into account.
Hard Money Lenders IO
There are some resources that can calculate the interest rate of a hard money loan based on various different factors. It’s important to note the interest rates of hard money loans are so high because they finance homes most a lot of financers won’t touch.
Here at Hard Money Lenders IO, we have a loan calculator where real estate investors can calculate payments on loans.
It’s also important to note not every hard money lender would give the same interest rate for the same property, which is why it’s essential to always get a second or third opinion whenever getting a hard money loan.
Some actionable ways to reduce the interest rate of a hard money loan are to put down a bigger down payment, improve your credit score, or make more real estate investments. This can manifest itself by paying off existing debts and maintaining a habit of paying off bills on time or early.
There are also other fees like origination fees, closing costs, underwriting fees, and processing fees. It’s important to not get bogged down in too many junk fees, and these loan origination fees are often accompanied by third-party fees. Most hard money lenders charge 3 to 5 points on most loans, and in real estate, a point is one percent of the loan amount.
A real estate investor using hard money loans has to determine whether the risks and costs of a hard money loan justify the investment. Hard money loans are great for building a real estate portfolio and provide accessible funds for investors. A lot of the time, cash or traditional mortgage financing can be very inaccessible for real estate investors.
It’s important to find a reputable hard money lender in particular. And we are here to help — we have a private money lenders directory where real estate investors can find the best hard money lenders in a nearby city or state.
In conclusion, hard money loan interest rates vacillate anywhere between 7.5% to 15%, but the rates differ depending on the experience of the borrower, down payment of the borrower, location and type of property, and credit score of the borrower.
Obviously, every real estate investor is in a different situation. At Hard Money Lenders IO, we offer a free consultation to answer questions for your particular investment goals or financial situation. We offer different kinds of loans for different types of real estate transactions, and our broker program helps a hard money lender find the best possible loan with the best possible interest rate.
Of course, we are hard money lenders ourselves, but we also want the best for each investor, even if we are not the lender you choose. It is essential to find the lender who gives the best rates and terms for your goals, especially as a new investor. Not every hard money lender gives to new investors or foreign nationals, but we do.
The average interest rate for a hard money loan vacillates, but there are actionable steps you can take to reduce that interest rate.
We’re here to help.
Adam Smith has spent the last 5 years in the Private Money Lending world helping real estate investors secure financing for their non-owner occupied real estate investments. When he’s not thinking about real estate, Adam is an avid Jazz music fan and fisherman.