The need for immediate funding for a real estate property sometimes spells the difference between securing the deal or not. Traditional loans will not be able to provide fast funds because of the credit and financial approach they default to when evaluating a loan. On the other hand, Hard Money Loans are asset or collateral-based loans that emphasize your collateral. Hard Money Lenders let you borrow based on the appraised value of your property, thus, allowing them to release loans in as short as one week.
New Investors or experienced real estate investors who focus on House Flipping and Rentals prefer hard money loans in securing deals because they provide funds in the shortest time possible. Because the faster the property is ready for the end users, the faster they can move to another project. Many investors in real estate also seek to build long-term relationships with their hard money lenders. A strong, mutually beneficial investor-lender business relationship is one way of securing preferential rates and deals from your lender.
Hard Money Loans in 2022
Halfway through 2022, the housing market continues to hold a relatively upward trend in real estate prices. Inflation is also on the rise, which has caused an increase in interest rates, including, among others, loan rates in housing. Interest rates amongst traditional lenders hover in the 5.8% region. So what is inflation, and how does it affect your mortgage and real estate investment?
What is Inflation?
Inflation affects us directly when the prices of commodities or goods we used to purchase increase. You go home with lesser produce and products from the supermarket given the same amount of money. You will also see increases in the prices of gasoline, utilities, interest rates, and rent with your stagnant paychecks. Your money loses part of its purchasing power. Simply put, you are going to pay $2 now for the same kind of burger you paid $1.50 a year or two prior.
Real Estate and Inflation
In the real estate industry, the initial reaction will be an increase in the prices of homes and loan interest rates, notably from traditional lenders. This combination results in a slowdown in the housing market because borrowers will shy away from higher home prices and loan rates. Inflation affects your real estate loan repayments differently, and this depends on the type of loan that you have.
Real Estate Properties
Real estate Property prices are not immune to the effects of inflation. They will eventually cope with the pressure, and property prices will also go up. Sometimes, the increase is so steep that buyers will hold off purchasing new residences or properties. Some even cancel from proceeding with the purchase. Couple this with the increasing interest rates from traditional lenders, and you will have an inventory of real estate properties that have stayed on the market longer than usual. In such cases, homeowners or sellers would eventually lower their prices until a balance or equilibrium in home prices restores in the market. For new investors, you should wait for this stabilization of real estate prices before buying a property, whether for rental or house flipping.
Adjustable Rate Home Mortgages
These mortgages typically have fixed rates that are lower than market rates. You can choose from having a 3-year to a 7-year fixed rate within a long-term mortgage. To illustrate, let us say you have a 30-year term mortgage. In this program, you can get a fixed APR of 3% for a fixed period of 5 years when the market APR is 5%. However, after the fixing 5-year period, your APR may change depending on the prevailing market rate, which can be higher than your initial interest rate. Whatever loan program you choose, do not discount the effect of high inflation on interest rates. It is best to carefully weigh the terms and conditions of your loan according to your needs.
HELOC Loans
Home Equity Line Of Credit Loans draw against the available equity on your property. A HELOC, classified as a second mortgage on your property, is best if you have substantial equity. HELOCs (refer to previous GL&L blog post) are relatively easy to obtain but do not have fixed interest rates. Thus, they are affected by changes in interest rates and inflation.
Hard Money Loans
Hard Money Lenders typically offer higher interest rates than traditional lenders. Because of this, a subsequent increase in Traditional Lender interest rates will not affect borrowers of hard money loans much, at least in their loan payments. One more thing is that hard money lenders offer fixed interest rates. Thus, there will not be any interest rate adjustments during the loan.
Hard Money Lenders are also almost always flexible with their terms and conditions, mainly because they are locally owned. There is no central office to report to when you deal with them. Maintaining an excellent long-term relationship with a hard money lender has its benefits. One is that there is a high probability that they can adapt to your situation. They can act fast on your deal, understand the local market, and can offer you free consultations.
When there is inflation, you can take advantage of the increase in your asset’s or portfolio’s value and convert the expanded equity to cash which you can use to pay off other debts or even purchase additional rentals. Rental rates increase with inflation, but mortgage payments remain the same with fixed APRs. Thus, resulting in more income for you.
Bottom Line
In an economy where a high inflation rate shows no signs of slowing down, consumers will feel the eventual increase in prices of goods and services. In the real estate industry, high inflation rates affect investors in good and bad ways. A general downturn in property portfolio expansion is inevitable, caused by property prices and mortgage rate increases.
In a high inflation economy, Hard Money Loans tend to be more stable funding vessels because of fixed rates. Thus protecting borrowers from accelerating mortgage rates, and your repayments will be the same every month.
With the support of Hard Money Lenders, you can take advantage of the effects of a high inflation rate. You can refinance your property to pay off some of your loans. You can add to your portfolio when property prices have stabilized.
Money Lenders know the area like the palm of their hands because most are local or homegrown businesses. Their inputs on the real estate industry in your area can be invaluable. You can also ask them about your deal. Expect them to act favorably if they find the deal profitable.
Hard Money Lenders with extensive experience in the industry can give you advice and pointers on your deal. Thus, new investors in the real estate industry can learn a thing or two from them.
Do you want to make your first real estate investment in Texas or Florida? GL&L Holdings, a premium Hard Money Lender in Houston and Florida, is always ready for a free consultation. You can email us at info@gllholdings.com or give us a ring at +1 832-770-9415. Let us beat high inflation together.
