For the last few years it seemed that the only way that people with equity could get money was to mortgage their properties with hard money loans. Hard money loans are equity lines with very steep interest rates, sometimes higher than 10% and low loan to values or what are commonly abbreviated as LTVs. That means that if you have a property worth $1,000,000 and only owe $500,000 or less, you can expect to get hard money loans without the usual hassle of having to prove where your income comes from or what your credit score is. With hard money loans, the investor is betting that you won’t make the payments and that he or she will pick up a great property with lots of equity with very little risk on their part.
There are whole real estate investment groups whose sole order of business is doing hard money loans. These investors are very savvy and will only entertain those loans where the equity on the property is sufficient for them to turn it over quickly should there be a default by the borrower. Unfortunately for borrowers, the investors are betting that they will default early on. Since most of these loans are for 1 to 2 year periods, interest only, the borrower has to quickly right his financial ship in order to make good on the loan.
This is not such an easy task for the borrower who goes after hard money loans. Even if they are able to get the loan, they must make steep monthly payments and after one or two years, depending on the term of the loan, pay back the complete principal which, since these are interest only loans, will not have been reduced. This means that if the borrower is given a loan for $500,000 at 12% interest (highly likely) their monthly payment will be $5000 or $60,000 per year. After one or two years their principal balance will still be $500,000 and due on demand. Sounds pretty awful, right? This all depends on how badly you need the money and what you need it for. Sometimes hard money loans can be lifesavers for cash-strapped investors or developers.
Hard money loans usually carry a very high interest rate but even this can vary wildly. Recently hard money loans have carried interest rates between 8% and as high as 21%, depending on the investor and also on the strength of the property. Hard money loans can be used for all types of properties including commercial real estate. Hard money loans are very expensive as well and most investors charge anywhere between 5 points and 10 points or more, again depending on the type of property and amount of equity.