Is A Hard Money Loan Right For Me?
Hard Money Loan Assessment
A loan of any type should only be considered when the value of having access to the capital now, is more valuable or profitable than the rate of interest you will pay once you have the loan. All loans considered by a borrower should be something they can comfortably pay on a monthly basis. Every loan type is debt. Debt is best used when purchasing an asset that will put money in your pocket or bring long-term value.
Questions To Consider:
- Do I need to close my loan in less than 10-days?
- Yes – a hard money loan is a loan collateralized by real estate. They are made by Private Lenders who only look at the equity in the property. Things that take time like home appraisals, home inspection and borrower underwriting are not required. This allows for a loan to be given in as little as 24-hours and is a great option if you need to close a loan quickly
- No – If you have 45 to 60 days to close on a loan, then an institutional lender like a bank or mortgage company will be able to offer the market’s most competitive rates.
- Do I need a loan to buy my primary residence
- Yes – In almost all cases a conventional loan is the best option for a person seeking a loan on their primary residence. There are unique situations when a Bridge loan might make sense, or when the borrower is only needing the loan for a short period of time.
- No – Then a Hard Money loan could make sense. Investment properties, like rentals or flips are the most common collateral for a Hard Money Loan.
- Do I need the loan for a long time?
- Yes – Then a Hard Money Loan probably does not make sense. Hard Money interest rates can range from 9% to 15% and would not be a bad loan solution for most borrowers. People seeking a loan on their primary residence should consider an amortized conventional loan that they can pay off over time and that is at the most competitive interest rate that their credit will allow.
- No – If you need the money for a short period of time (generally less than 2-years) than a Hard Money loan can makes sense. Banks generally do not want to make loans that are less then 5-years in duration and the shorter time requirement will probably limit your lending options. In short term financial situations, the higher interest rate you will pay may be less important and the value of having access to the capital may be more important.
- Do I plan to sell or refinance my property within the next 24 months?
- Yes – When you need to borrow money for a short period of time a Hard Money loan can make sense.
- No – If you plan on keeping a property for more than 2-years then you should consider an amortized conventional loan that can be paid off over a longer period of time and that is at the most competitive interest rate your credit will allow.
- Do I want to purchase a property for cash
- Yes – A Hard Money loan, because it can be transacted so quickly can be like a cash offer. This can allow real estate investors to go after properties that would not otherwise be conventionally financeable. A cash offer is required for foreclosures, bank owned properties, and distressed property purchases. The goal of paying cash or buying a property with a Hard Money loan would be to acquire that property at a below market price.
- No – If you are going to purchase a property at market price then take your time and get a conventional loan. If you cannot qualify for a conventional loan, figure out why and then take the necessary steps so that you can qualify in the future.
- Do I need to pay back my retirement account like a IRA or 401K
- Yes – if you have borrowed money from your retirement account, they generally have to be repaid in a relatively short period of time. If you do not re-pay yourself, you will have to pay ordinary income tax, state tax and a 10% early withdrawal penalty. Depending on your tax bracket, you could be paying as high as 60% on that money you borrowed. In that case, a 12% Hard Money loan starts to be a very good option.
- No – Good for you. Try never to borrow from your retirement account unless you know you can pay it back quickly. The cost of not doing so are very high.
- Am I real estate rich but cash poor
- Yes – Some of us have saved for a long time and find that they are real estate rich, but cash poor. Getting access to that cash can take time and good credit. If you find that you need quick access to your saved equity, then a Hard Money Loan can make sense
- No – All loans require collateral and real estate is the most commonly collateralized asset. If you do not have existing assets, there is nothing to borrow against.