A hard money loan should only be considered when accessing capital now provides greater value or profit than the interest costs. All loans should be comfortably affordable monthly and used to purchase assets that generate income or provide long-term value.
Here are seven key assessment questions:
1. Timeline Need: If closure within 10 days is required, hard money works since private lenders focus on property equity without lengthy appraisals or inspections. Otherwise, banks offer competitive rates with 45-60 day timelines.
2. Primary Residence: Conventional loans suit primary residences in most cases. Hard money applies to investment properties like rentals or flips.
3. Loan Duration: Hard money isn't ideal for long-term needs (rates range 9-15%). For short-term requirements under 2 years, hard money compensates for higher rates through capital accessibility.
4. Exit Strategy: Properties planned for sale or refinance within 24 months align with hard money terms. Longer holds warrant conventional amortized loans.
5. Cash Purchase Goals: Hard money enables cash-like offers for foreclosures and distressed properties purchased below market value.
6. Retirement Account Repayment: If repaying borrowed retirement funds, a 12% hard money loan becomes attractive versus potential 60% tax penalties.
7. Real Estate Equity: Hard money requires existing real estate collateral. Those real estate-rich but cash-poor benefit from quick equity access.