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Like all other loans, a Hard Money Lender binds a loan contract with terms that define the loan amount, interest rate, period of payment, and other conditions. The loan terms show how much you will be paying and for how long. They are also interconnected, and any change in one affects the others. For instance, a lower term increases monthly amortization, and so can a higher interest rate. A lower interest rate can decrease monthly amortization, and so can a higher equity. In this article, we will help you decode Hard Money Loan terms and learn how they relate to each other.
We will also help you understand Hard Money Loan terms better so you can perform a more in-depth analysis of your loan application. With this knowledge, you can discuss your loan terms with your lender for a more comfortable repayment scheme.
To demonstrate the dynamic relationships between Hard Money Loan terms, we will illustrate this with an example. But before that, let us first define each one of them.
The ARV is the After Repair Value of your property. Appraisers derive this value from various sources. They consider property location, the home market in the area, your plans, and the cost of property improvements to compute the ARV. Third-party appraisal agencies accredited by your lender usually prepare the appraisal report of a collateral property.
Also popularly known as the LTV ratio, this is the percentage a Hard Money Lender is willing to give as Loan Amount. It is based on your property’s ARV or After Repair Value. Hard Money Lenders usually allow LTV ratios of not less than 75% of the ARV. The low LTV ratio serves to protect their interests in the transaction.
The ARV and LTV ratio defines how much an investor can borrow against the property. To compute for the maximum amount allowed on the property, you multiply your ARV with your LTV Ratio. To illustrate, if your property’s ARV is $500,000.00 and LTV is 75%, you will get a maximum Loan Amount of $350,000.00.
Also referred to as simply Equity, it is your share in the property you are present as collateral. Proactively, it is what you have to shell out in cash to fill the difference between the value of the property and the loan amount. Equity in traditional mortgages is also known as the downpayment for the property. Hard Money Lenders require high equities to compel borrowers to be more involved in the deal.
The interest rate is the cost of the money you borrow, which also defines how much a lender charges as income from the funds lent to you. Lenders usually quote Interest Rates on a monthly or annual basis. Sometimes, though, lenders quote rates for the whole loan period. Interest rates for Hard Money Loans range from 8% to 15% per year. Your interest rate may depend on how potentially profitable your real estate project proposal is.
Not to be confused with the terms and conditions of a loan, the loan term is your payment period. Hard Money Loans are relatively short-term loans with terms ranging from 3 months to a maximum of 36 months. Real Estate investors find short-term loans advantageous because they do not have to wait long for the loan to mature. Real estate investors designed their business model to pay off loans within a short term.
Origination Points are the fees your lender charges to process the loan application. These charges go to operational costs that include underwriting, verifications, and loan processing, to name a few. Essentially, 1 point is equal to 1% of the loan amount. Thus, a fee of 3 points is equivalent to $12,000 on a $400,000.00 loan.
Here are sample loan scenarios to help you decode, visualize, and understand Hard Money Loan terms more. For these illustrations, we have made assumptions. The numbers for all graphs are the same unless otherwise indicated.
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Rates are certainly substantial, but definitely not the end-all, be-all especially when it comes to investing in real estate. There’s more to the picture that can significantly impact the success