- March 2, 2023
Figuring out a hard money loan can be a complex process. There are many variables, such as fees and interest rates, to consider. Fortunately, with a hard money loan calculator, you can easily calculate your monthly payment on a hard money loan. It’s as simple as inputting the principal balance, interest rate, and repayment period into an online calculator, and it will do the complex calculations for you.
Hard money lenders consider the appraised value of property to determine the total loan amount; these same factors are used in a hard money loan calculator to create an accurate monthly payment estimate.
This valuable tool makes it easy to budget for hard money loans and prepare you for their associated costs before signing on the dotted line.
What Is a Hard Money Loan?
A hard money loan is a short-term loan that offers borrowers capital in exchange for using their property as collateral. Commonly used by real estate investors, these loans are often loaned out faster and with fewer requirements than standard bank loans, making them ideal for situations that require quick access to funds.
The high interest rates associated with hard money loans make them risky for borrowers. Still, those willing to take on the risk may find themselves in an advantageous position. For investors looking for an attractive return on their investment, taking out a hard money loan can be an effective strategy.
Hard Money Loan Formula and Calculation
Calculating a hard money loan can seem quite daunting. However, it can be relatively easy with the correct information and awareness of the formula.
The formula requires you to consider the purchase price and loan-to-value (LTV) ratio. It also includes the interest rate of the loan as well as the loan term.
Knowing these factors and how they work together with the LTV will allow you to calculate a hard money loan more accurately.
Hard Money Loan Calculator
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What Is the Typical Payment Structure and Term on a Hard Money Loan?
Hard money loans typically come with higher interest rates, larger down payments, and shorter repayment terms. Generally, they are repaid within a year or two, but the repayment period can vary depending on the borrower’s specific situation.
While payments may change slightly from lender to lender, they usually include a one-time down payment followed by regular loan payments for the duration of the loan. The payments are often interest-only and have balloon payments at the end of the term to ensure that the loan principal is paid back in full by the end of the loan period.
Borrowers must know their funding options when considering a hard money loan to decide whether it is best suited for them.
Typical Hard Money Loan Rates
Rates for hard money loans can vary, but the average interest rate is generally between 10% and 18%, which is significantly higher than a conventional loan. On top of that, other costs are often associated with these types of loans, including points and origination fees ranging from 2% to 6%.
When Should You Use a Hard Money Loan?
Hard money loans can be an excellent option for those experienced in real estate who need a short-term loan with quick approval. These loans are often more expensive than traditional mortgage loans. Still, they are sometimes the best fit for particular projects, especially when purchasing discount properties or fixing-and-flipping houses.
While not every project requires a hard money loan, investors should become familiar with this type of financing and determine if it fits their current circ*mstances. These loans can help accelerate projects by eliminating lengthy application processing times and providing access to capital quickly.
Example of a Hard Money Loan
You want to purchase a fix-and-flip property that costs $300,000. To conserve capital for remodeling and renovations, you decide to take out a hard money loan to gain quick access to finance to fund the project. You approach a lender with a $90,000 down payment and ask for the remaining $210,000 over 1 year. The fee structure* could look something like this:
Interest | 12% | $25,200 |
Origination Fee | 3% | $6,3000 |
Underwriting Fee | $1,000 | $1,000 |
Appraisal Fee | $1,000 | $1,000 |
Total | $33,500 |
As per this example, you would need to pay the $8,300 in fees upfront and 12 monthly interest payments of $2,100 over the 1-year term of the loan. The remaining $210,000 principal balloon payment would be due at the end of the loan contract.
*This is a basic example. Additional fees and rates may differ from lender to lender.
How Do You Negotiate with a Hard Money Lender?
The first step is to be realistic and have a solid understanding of the fund’s objectives and the market you are working in. Researching the terms of comparable deals can provide valuable insight into what kind of deal you should seek from the lender, and it’s best to be prepared to present your case.
Knowing what they consider reasonable terms and conditions, such as loan amounts or interest rates, can help create an effective negotiation strategy. Additionally, having a clear vision of your investment goals and demonstrating why this loan would benefit both parties can make the process smoother.
Lastly, it is essential to remain flexible to reach a mutually beneficial agreement. By staying patient and understanding throughout the negotiation process, you will have the best chance of securing the deal with a hard money lender that meets both of your needs.
Can You Pay Off Your Hard Money Loan Early?
Paying off your hard money loan before the expected due date can be beneficial for many reasons. Not only do you get rid of debt more quickly, but you might be able to avoid costly fees associated with long-term loans. It can also help to boost your credit score if done correctly.
Before making any decisions on how or when to pay a loan off early, read all the terms and conditions associated with it. This way, you won’t find yourself stuck in unexpected loan pitfalls or extra charges.
While most hard money lenders do not offer any incentives for paying off your loan early since they rely on interest charges for their income, some provide discounts for prepayments. It’s always wise to ask your lender about all available payment options before agreeing; that way, you’ll be better informed of how repayment terms will affect your financial situation.
Are Hard Money Loans Expensive?
While it is true that hard money loan rates are usually higher than traditional bank loans, the terms often make them worthwhile. They also offer quick and easy access to capital and favorable repayment arrangements. This can be especially beneficial for those looking to purchase a home or finance a business venture, as these more significant investments need funding now rather than later and may come with greater risks and rewards.
Additionally, those looking to purchase property in the short term may find that the shorter repayment periods used in hard money loan agreements work well for their needs. Therefore, whether hard money loans are expensive depends significantly on a borrower’s needs and preferences.
Alternatives to a Hard Money Loan
With the current economic climate, many people face the complex decision of what type of loan to pursue. While a traditional hard money loan may be an easy solution in some cases, it is not always ideal.
Fortunately, alternative financing options are available for those who want to save money or access more flexible terms. Options like bridge loans and working capital provide borrowers with a viable path to secure much-needed financial resources while minimizing risk.Additionally, relying on a home equity credit line can give borrowers more independence and ensure they won’t be tied into lengthy contracts or high interest rates like they might with a hard money loan. Government-backed loans such as Federal Housing Administration (FHA) mortgages and the Department of Veterans Affairs (VA) loans may be available depending on your qualification status.
