Property investors utilize hard money (HM) and short-term real estate loans to buy and repair houses. A HM lender gives the investor the money they need to buy the property to then carry out high ROI repairs and increase the home’s value.
It is important to note that the investor must repay the HM loan amount within the agreed loan period (typically within 12-24 months). More often than not, the revenue generated by the sale of the home is used to repay the lump sum.
In most cases, HM lenders will supply 70% to 80% of the resources required to finish the project, leaving the difference up to the investor. For the investment to be lucrative, the property’s after-repair value must be much more than the initial purchase price.
How is the Interest Calculated for a HML?
Reliable HM lenders, such as 44 Oak Capital, provide interest-only repayment plans. If you were approved for a $200,000 HML at a 10% interest rate, your monthly bill would be $1666.67. This is how it works:
- Loan Amount: $200,000
- Rate of Interest: 10%
- Monthly Repayment = Loan Amount * Annual Interest Rate / 12 Months
- Monthly Repayment = $200,000 * 10% Interest / 12 Month
In other words, your monthly bill will only cover the interest of the borrowed money; you must repay the entire borrowed amount at the end of the loan term.
How are Monthly Payments Calculated for a HML?
The interest rate alone on a HML is covered by the monthly payments. After the loan’s term is up, you are expected to repay 100% of the capital borrowed using a portion of your profit.
For instance, suppose you requested $150,000 in HM financing with a 10% interest rate and a 6-month loan duration. In this scenario, you would pay:
- First Month: $1,250 ($150,000 * 10% interest / 12 months)
- Second Month: $1,250
- Third Month: $1,250
- Fourth Month: $1,250
- Fifth Month: $1,250
- End of the sixth month: $150,000
Aside from a higher interest rate, this is one of the fundamental differences between a HML and a traditional loan; the monthly payment from a conventional lender combines the interest owed and the remaining capital amount, allowing the borrower to pay off their entire loan amount gradually. With every payment, the lender gradually reduces the capital so when the loan expires, there will be no more payments.
Due to difficulties it could pose for cash flow; conventional financing strategies is are often ineffective for real estate investors that flip houses. HM lenders like 44 Oak Capital offer quick borrowing solutions for real estate investors who need to close on a purchase right away.
How Much are Typical Rates for HMLs?
Based on the HM lender you select, your credit history, and level of expertise with property flipping, HML rates normally vary anywhere from 7.5% to 15%.
These factors will often affect the final amount that is provided to you significantly. In general, prior experience and a strong credit score will reduce your mortgage rate.
How Much Money Should You Put Down for a HML?
The typical down payment for a fix & flip is between 10% to 20% of the total renovation cost.
For instance, if the HM lender covers 90% of the total cost, the borrower would be responsible for the remaining 10%.
What is the Minimum Credit Score Required for a HML?
Borrowers typically need a credit score of at least 600. HMLs are an excellent choice when compared to traditional loans that often require a credit score between 680 and 700.
Credit score criteria may be higher if you want to maintain and rent the house, usually around 680 due to the higher risk factor. If you have a good credit score, you can easily apply for a loan from 44 Oak Capital.
Why Choose a Hard Money Loan over a Traditional Loan?
Traditional loans often have lower interest rates, but the application and approval processes are far more rigorous and time-consuming, which may be a deal-breaker when trying to close on an opportunistic fix & flip. Most of the time, you have to act quickly to seal the deal before another buyer does. Investors may benefit greatly from working with a HML like 44 Oak Capital. Effectively, you will receive:
- Flexible loan periods
- Simple loan applications
- Low stringent financial requirements
- Fast approval
- Quick proof of funds
What is an Origination Fee?
HMLs include an extra expense known as the origination fee, typically calculated by percentage, between 1% and 3% of the mortgage varying by lender. The lender levies this fee on the borrower to pay for the costs involved in initiating the loan process.
For example, if your mortgage is $350,000 and the origination fee is 1%, the cost would be $3,500. Our HM calculator includes the percentage for this expense.