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.
Are there “100% financing” deals or is that a myth?
Many HML tell me that you have to come up with some money for them to lend you money.
What do you know about that?
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A hard money lender is similar to a private lender. Some even use the terms interchangeably. The main difference is that a hard money lender has a more formalized lending system in place, advertises their services, and will take the property as collateral in case of default.
Hard money lenders typically charge high interest rates (7%-13%) and will include other fees, such as loan origination fees, loan servicing fees, and closing fees. The loan is primarily based on the property’s value, and the term lengths of hard money loans are usually short (around 12 months), but they can be extended.
Advantages of this type of loan are quick funding, especially when you need to jump on a deal before it slips by. The terms are usually more flexible than going through the banks, and these types of loans are available for investors with recovering credit.