What are the Advantages and Disadvantages of Hard Money Loans?
If you’re looking for hard money loans in Marin County, you need to know both the upside and downside of private financing to decide if it’s right for you.
Advantages of a hard money loan:
- Accessible to lower credit or income borrowers, with an emphasis on property value over credit or financial situation
- Faster approval and funding times (a few days versus weeks or months) with less extensive credit checks and fewer strict regulations
- Flexible repayment schedules and terms negotiated with the lender based on your needs and goals
Disadvantages of a hard money loan:
- Higher interest rates and fees than traditional loans, as the lender absorbs more risk24
- Shorter terms than conventional loans, usually ranging from 6 months to 3 years24, giving you less time to repay the loan and possible penalties for defaulting or failing to sell or refinance the property
- Fewer federal or state borrower protection regulations2 and less recourse if you encounter problems with the lender or loan agreement
Make sure to weigh the pros and cons of a hard money loan carefully before applying.
What are the Costs of a Hard Money Loan?
The costs of a hard money loan vary depending on the lender, the property and the borrower. However, some common costs are:
- Interest rate: This fee is the percentage of the loan amount you pay the lender to borrow money. Hard money loans have higher interest rates than traditional loans, usually ranging from 10% to 18%.
- Upfront points: These fees are a percentage of the loan amount that the lender collects at closing. One point equals 1% of the loan amount. Expect to pay anywhere from two to five points.
- Closing costs: These fees are for various services and expenses to finalize the loan transaction, such as appraisal, title insurance, escrow, recording, etc. Hard money loans can have higher closing costs than traditional loans due to these additional fees and charges. Always compare different hard money lenders and their terms before applying for a loan — and factor in these costs to calculate your potential return on investment or profit margin.
