The downside is that these loans often come with high-interest rates. Before you take out a hard money loan, it’s important you understand what your interest rate will be.
In this article, we’ll tell you what determines hard money loan rates.
The Riskiness of the Loan
As with any type of loan, one of the most important factors in determining hard money loan rates is riskiness. If the lender thinks there is a chance you won’t pay the loan back, they’re more likely to charge a higher interest rate.
And unfortunately, hard money loans are inherently risky. That’s because lenders will give you a hard money loan without checking your income, net worth, or anything else.
All you need to do is put up a piece of property as collateral. The advantage is that you can take out a hard money loan with little wait time.
Basically, hard money loans provide you with fast cash in exchange for higher interest rates. You shouldn’t expect an interest rate lower than 7%. And it could go much higher depending on how risky the market is and what type of property you’re leveraging.
The Collateral You’re Using
In most cases, you’ll use real estate as collateral for your loan.
The more “liquid” it is, the better interest rate you’ll receive. In this case, liquid real estate is real estate that’s easy to sell for cash. A property in a popular neighborhood is more liquid than real estate that’s in an empty neighborhood.
If the lender is forced to take your collateral (because you failed to pay the loan), they’ll want to be able to turn it over quickly and make their money back. Hard money loan rates will be much higher if the lender thinks this process will be difficult.
The Loan to Value Ratio
The loan to value ratio (LTV) is the value of the loan divided by the value of the collateral. Most lenders will allow up to 70% LTV for a hard money loan.
In general, the lower the LTV, the better interest rate you’re going to get. With a low LTV, lenders know the collateral they’ll receive is much larger than the amount they’ll lose, so they’re more likely to offer a forgiving loan.
If you’re planning on improving the property, it’s possible to take out a loan based on after repair value (ARV) of the home. This will allow you take out more money (which you can then use for the repairs), but will also usually come with a higher interest rate.
Competition Drives Down Hard Money Loan Rates
Finally, more competition in the lending market leads to lower interest rates. For example, California has a lot of lenders, so its hard money loan rates tend to be lower than the national average.
Take Out Your Hard Money Loan Today
Use an online hard money loan rates calculator to get an idea of what you’re rate will be.