You’re probably already familiar with the standard mortgage loan, which is backed by the value of the home in question; you recompense the lender in the form of interest payments + monthly payments towards the principal. The term is often about 30 years but can be as low as 15. Hard money loans are similar to mortgage loans, except the property in question pays for itself over a considerably shorter period.
The Purpose of Hard Money Loans
Because of the relatively fast repayment schedule, hard money loans are employed by real estate investors for short-term negotiations. For example, you may be interested in investing in flipping houses, which means you’ll need cash to fix it up and sell it within weeks or months – or at least, be ready to do so in case the local housing market shifts favorably for investors.
Another scenario in which the hard money loan is useful is as a bridge for property acquisitions. A buy-and-hold strategy often requires several financing options to mitigate your losses during the hold period. If you employ hard money to acquire the property, you will likely need a traditional loan package to then recompense the original hard money lender, who was essential in buying the property quickly.
There are some notable differences between traditional loans and the hard money variant. The first and most relevant one is the length of the repayment period: for the hard money option, you usually have between 6 and 18 months; whereas for the traditional loan you have up to 30 years. Because of the short amortization period, hard money loans often have interest rates that average 7% higher than other loans.
Another major difference was elucidated above: short-term investors pursue hard money loans, whereas long-term investors pursue traditional loans. Of course, the former can transition to the latter within the course of the same investment.
If you need a versatile and flexible hard money loan, contact the team at New Horizon Capital Funding.