The Ups and Downs of Hard Money Loans

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Hard money loans are a specific type of loan that you cannot get through a bank or other normal financial institution. They are usually provided through a private lender and are often used for real estate purposes with a high turnaround rate. They might also be considered “fix and flip loans” or even mortgage loans, because house flippers use them to buy, renovate, and flip homes in a fast amount of time. These loans are meant to be paid back in short periods of time and can come at a greater risk for both the lender and the borrower.

How Do Hard Money Loans Work?

Hard money loans aren’t meant to replace regular mortgage loans. This is because they are generally meant to be paid back within a space of one to three years. The idea is that there is physical collateral used to obtain the loan and the value of the loan is based on the value of the collateral. That’s part of why it’s such a popular option for house flippers. They can put the house up for collateral, fix it up, and then sell it at a profit. This allows them to pay back the loan in time without losing money.

These types of loans come in handy in situations where someone needs a large sum of money, but they know they will be able to pay it back quickly. This is why they don’t work well in place of regular mortgage loans, because those generally take many years to pay off. They have a few pros and cons depending on the situation.

Advantages of Hard Money Loans

Hard money loans are great for people who don’t have the best credit but need money in a timely manner. This is because they don’t usually require background or credit checks. The collateral is the important part to the loan provider, so as long as the borrower has something to bring to the table, they should be able to obtain a loan.

Another advantage is that they don’t take as long to process. It’s possible for people to get the money they need faster this way. This is due to the loan coming from a private lender and the lack of extra checks they have to run.

Disadvantages of Hard Money Loans

A couple of downsides for the borrower is that interest rates are likely to be higher in this situation and they have less time to pay the money back. The only protection against default is the collateral that was offered, so lenders usually want some added defense in the form of higher interest, with the average rates in Atlanta being 13.3%. They also want to keep the lending period short and make the process quick.

A downside for lenders is that lack of extra protection. Everything rides on the collateral that was offered and the borrows ability to quickly pay back the loan. That’s why it’s wise to assess the situation carefully before agreeing to give this type of loan to someone.

Should You Get a Hard Money Loan?

There are a few questions to ask in order to determine if you should take out one of these loans. The first is whether or not you will be able to pay it back in a timely manner. Unlike mortgage loans, you will likely have less than five years to pay back your hard money loan and the inability to do so would lead to losing your collateral.

Another question to ask is if you have collateral that is worth what you are asking for. Lenders won’t want to issue a loan to someone who doesn’t have collateral that can reimburse them in the event of a defaulted account. You have to be able to make a deal that is worth your lender’s investment.

If you need money quickly and are confident in your ability to pay it back, hard moan loans could be right for you. For more information, feel free to reach out to Hard Money Georgia today.