I am new to creative investing and trying to better understand hard money loans. Specifically points and interest rates and how to calculate those numbers.
Hard money loans are based on the value of the asset, not the borrower. These types of loans are more expensive and carry premiums in the form of points - 1 point is equal to 1% of the loan amount - and may carry prepayment penalties and fees. They are easier to get and are widely available in every state. As long as the numbers work and you can make money on the deal, hard money may be the way to go.
Calculations…you need to know three variables to solve the fourth one. So if you want to know what your monthly payment is, you’ll need to know the principal amount, term, and interest rate.
Free loan amortization tables are widely available online.
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Alexander above gave a good general description. Hard money lenders tend to focus primarily on the deal, as opposed to the borrower. However, underwriting policies will differ from lender to lender. For example, some hard money lenders require tax returns, some don’t. Some have minimum credit score requirements, others don’t (you get the idea). Hard money loans are indeed easier to obtain than traditional bank loans. They require less documentation, which enables faster closings. Another important feature is that hard money lenders will lend against properties that need significant renovation. Banks tend to favor properties that are move-in ready or need minor cosmetic work.
With regards to points, 1 point = 1% of loan amount.
Most hard money lenders charge simple interest on an annualized basis. Therefore, once you know the principal loan amount and the interest rate, you can multiply the loan amount by the rate and divide by 12. That will give you the monthly payment. Example:
Loan amount: $100,000
12% simple interest
$100,000 (loan amount) x 12% (interest rate)= $12,000 (total interest for the year)
$12,000 divided by 12 = $1,000 (your monthly payment)
Hope this helps.