Need Hard Money / Private Money Short Term?
With the Mortgage Crisis in full swing and many "Investors" wanting to take advantage of a down market in Real Estate I have found many Investors are turning towards Hard Money / Private Money Mortgages for their financing needs. The purpose of this post is to inform the novice or the short term investor what to expect when choosing this type of financing.
Before I begin please understand the following:
Your Loan is a High Risk Loan
No Matter if You Have the Following:
Your Loan is a High Risk Loan Period.
I have found many either Novice investors or Investors new to Hard Money lending getting confused with points vs. rate. Many believe that it is a "Good Thing" for the Hard Money Lender to be paid off quickly and therefore don't have to pay a lot of points. WRONG!
Please remember these Lenders are not the Church, they are not a Charity, they are in business to maximize their profits. The money that they are lending you has to be pulled out of somewhere else where they are making a return on their money so hopefully they will make a higher return with you and your loan. By paying off your loan quickly the Interest rate that they are charging is insignificant because you will only be making a few payments. (Short term meaning under 6 months)
Example:
Loan Amount: $250,000
Interest Rate 12% = $2,500
2 Points = $5,000
Gross Profit of $7,500
Now keep in mind that is gross. They have an office staff they have to pay for out of the profit. In addition please take a look at it from the Hard Money Investor for a moment.
Hard Money Lenders Point of View:
$250,000 liquid making X (in a safe investment)
3% Return on your money for a High Risk loan. ($7,500)
Would you reach in your pocket and lend your money on a high risk loan (No Matter how you look at it, when you go to a Hard Money Lender it is a High Risk Loan) for a 3% return? I know my answer would be a big NO! Now lets take a look at reality.
Loan Amount $250,000
Interest Rate of 12% = $2,500
5 Points = $12,500
For a Gross Return of 6%
This is better but not great. Please remember if you choose to seek out a Hard Money / Private Money loan don't let yourself get to involved. Please look it at from their side for a moment. These Lenders DO NOT want your property. Especially in the current Market.
For more information on Hard Money / Private Money: Mortgage Advice in South Florida
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Full-Time Mortgage Broker in South FL. Palm Beach County. Specializing in Hard Money / Private Money, Foreign Nationals, Jumbo and Super Jumbo Loans. In addition I work with Today's Premiere Lenders.
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Hard Money = High Risk. Absolutely! Spot-on Matthew and a no frills explanation of the reality & reasons behind Hard Money. I know first hand that you know your stuff in regards to this product.
Jason, Thank you..:-)
I get scared of hard money in this market...but I guess since you explained it carefully anyone who calls you would appreciate that it was explained up front.
Neal, You should not be scared of hard money. Think of it as gambling but in this case you play the house..:-)
isn't the 3% or 6% return only if the HM loan was out for only one month?
the return increases as the # of months the money is out increases, right?
if in the 1st example, the money was out for 6 months, the payments would be $15000 + $5000 in points = 20,000 / $250,000 = 8% return
or did I miss something?
I've never used hard money but recently contacted someone about private money - are the two terms synonymous?
Great Catch Wendy! I have been contacted by several people who only want the money for 1 month and wrote 6.. However, using the money for 6 months you would only make 5 payments which would = 7% return on the first example and a 10% return on the example number 2.
As far as the two terms go. Private money comes from an individual or an investor and hard money comes from more of an institution. Both do the same type of loans though. (Also it helps me on SEO)
Matt,
Great explanation. We do quite a bit of hard money, and I appreciate your post.
Mike in Tucson
Mike, Thank you..:-)
Matt.... from my understanding, going hard money from a borrowers point of view with these LTVs, rates, and points, would only be if they wanted to flip the property and close quickly? Would there be any other reason to do a hard money deal, other than if the property was unique and didn't meet Fannie requirements?
Jeff, Very true Hard money is a tool for investors and If credit is an issue or like you say the property doesn't meet fannie's guidelines.