The average interest rates on a hard money loan vary from private lender to private lender but generally are between 9% and 14% annually. If it sounds high for you, keep one important thing in mind: hard money lenders fund the type of loans that conventional lenders (such as your bank or credit union) will not touch with a ten-foot pole, no matter how much you are willing to pay them. The truth is that the average interest rate on a hard money loan reflects the high risk that a private lender takes by financing the transaction.
Real estate flippers are focused on different types of homes: those in various stages of disrepair. Those disrepairs might range from those requiring cosmetic modernizing to the full gut-jobs. Regardless of where they are, conventional lenders are reluctant to finance them leaving investors with four choices: finance them entirely with their own cash, get a partner (and split the profits), use private financing or, finally, sit on the sidelines watching other people make money.
“The average interest rate on a hard money loan reflects several risks undertaken by a private lender: the poor condition of the property, the high leverage offered, and more inclusive underwriting.”
The average interest rate on a hard money loan also reflects another risk private lenders take: the amount of leverage they provide to their borrowers. Hard money loans are often based on the after-repair value of the property – a value that is presumably significantly higher than a purchase price. Depending on the spread, a private lender often ends up financing close to the entire purchase price and then some. Think about it: a conventional lender will not finance ANY percentage of the purchase price. A private lender will take the risk of financing 100% of it or, in some cases, even more.
Another way of how hard money financing allows real estate investors to compete with all-cash offers is its streamlined underwriting. A well-run hard money lender should be able to close their loan as fast as a cash buyer. Underwriting criteria vary from private lender to private lender but, in general, it’s significantly less stringent than with conventional lenders. For example, we at New Funding Resources don’t verify your income and are not credit score driven. The streamlined underwriting process private lenders offer levels the playing field between those with very deep pockets and those who might not have enough of their own funds to buy a property outright. However, the more relaxed the underwriting, the riskier it is. This is yet another reason why the average interest rate on a hard money loan is higher than conventional interest rates you might be used to.
Despite offering real estate financing that is inherently high-risk, hard money loans should not be confused with subprime loans of the yesteryear. Hard money cannot be used to finance owner-occupied homes and is reserved exclusively for investors. It’s a short-term solution designed to help acquire and rehab an investment property. Once the renovations are complete, there should be no reason to hold on to private financing. Most borrowers repay their hard money loans by either selling the property or refinancing it within twelve months of origination.
The average interest rate on a hard money loan might be between 9% and 14% but the ultimate rates depend both on the lender and the borrower. With us at New Funding Resources. the stronger the borrower profile is, the better the rate he or she can qualify for. Remember, when it comes to doing business (regardless of whether you are a lender or a real estate investor), it’s all about the risk and managing it accordingly.