Northwest Private Lending explains four key hard money lending concepts:
Interest-Only Payments: Unlike traditional loans with amortized payments covering interest, taxes, insurance, and principal, hard money loans typically require interest-only payments. This approach allows borrowers to make minimum monthly payments while handling taxes and insurance independently. Principal payments remain optional throughout the loan term, with full repayment commonly occurring through property sale or refinancing.
Points or Origination Fees: These interchangeable terms describe upfront lending fees. Origination fees typically range from 2% to 6% of the loan amount and cover the lender's business costs. Hard money lenders charge higher fees than conventional lenders because these loans are short-term (one to two years), providing limited time for cost absorption.
LTV (Loan to Value): This metric represents the loan amount divided by property value, expressed as a percentage. Hard money lenders determine value through various resources rather than traditional appraisals and establish individual maximum LTV requirements based on location, property type, condition, borrower intentions, and transaction type.
Asset-Based Loans and Lenders: These loans are secured by collateral such as houses, land, or equipment. Hard money lenders operate similarly to pawn shops but on larger scales, providing short-term financing backed by real property.