Both hard money and private money loans are asset-based loans, meaning that they are backed more by the strength of a real estate purchase than the financial credentials of the borrower. They are also both from non-traditional, or private, lending sources, so you won’t usually see it offered by a bank or national lender. Despite their non-traditional status, private lenders are still organized money lenders, and are usually in some way licensed to loan money. They could be a friend, family member, business associate, or in our case, a mortgage loan company.
Hard Money Loans
Hard money loans typically have certain lending criteria such as set terms, interest rates, and upfront points, all of which are known prior to the loan being issued. Hardy money loans are typically short term with high interest rates (to mitigate their risk).
While hard money is certainly more expensive to borrow, it may be worth considering as you will be able to move on a deal much faster than if you had gone with a traditional loan. Hard money loans are usually offered at a 70% Loan to Value.
Private Money Loans
Private money loans are much more flexible than hard money loans. Most loan criteria are open for discussion, and can be negotiated to fit the needs of the borrow while still being comfortable enough terms for the lender. With a private money loan you may benefit from:
- Larger limit on the loan amount,
- Lower interest rates, and a
- Longer loan term compared to a hard money loan.
- You will also benefit from faster and more efficient transactions.
Using Private Money Loans to Purchase Real Estate
Private money loans are commonly used for the purchase of a real estate property and it’s renovation costs, especially when those deals have a chance of generating a large profit for all parties involved by reselling the newly remodeled property.
When using a private money loan, the mortgage and promissory note are held by the lender at closing. You will be able to proceed with the purchase and renovation, putting the funds to work. Following completion of the construction and repairs, the property is listed for resale, which it is expected to sell quickly. Upon the sale, the lender will be paid their principal plus the agreed upon interest, and the borrower will keep the difference in the profit.
Hard Money & Private Money Loans FAQ
- What are typical interest rates on a hard money loan?
The lender’s interest rate can fall between 8% to 18%. The rate will depend heavily on the return value of the property, the borrower’s credit score, and the experience of the borrower in real estate deals with hard money loans.
- Are other fees charged by private and hard money lenders? Yes, you also can expect hard money lenders to charge 2 to 10 points (2% to 10%) of the loan amount.
- What are typical interest rates on a private money loan? Interest rates on a private money loan may vary between 8% and 12% but can be altered according to negotiations between the lender and the borrower.