How to Calculate the Cost of a Hard Money Loan
If you’re looking to invest in real estate, depending on your investment strategy, you may explore the idea of getting a hard money loan. Hard money loans are great for short-term projects, like fix-and-fips or renovating rental properties. They offer quick access to funds without the time-consuming process of traditional loans. However, they do come with higher costs. Today, we’ll review how to calculate the cost of a hard money loan and how to get the best terms possible for your real estate project.
Contents of This Article:
- How Much Does It Cost to Get a Hard Money Loan?
- What Costs Go Into a Hard Money Loan?
- How to Calculate the Cost of a Hard Money Loan
- Can You Negotiate With Your Lender to Lower Costs?
- Find a Loan That Works for Your Investment Today
How Much Does It Cost to Get a Hard Money Loan?
Getting a hard money loan is generally more expensive than getting a traditional mortgage loan. This is because most lenders charge higher interest rates (usually around 8% to 15%) and additional fees to offset the potential risk. So, in addition to higher rates, borrowers can expect to pay origination fees, points, and other costs like appraisal, underwriting, and legal fees.
Ultimately, the exact cost of a hard money loan depends on the lender, loan terms, and property type. However, these Maryland real estate loans are generally used for short-term financing when speed and flexibility outweigh the higher costs.
For example, if you’re looking to finance a property for $150,000 with a hard money loan, the total cost can be upwards of $177,000. Here’s a breakdown of the additional costs and fees for a one-year hard money loan.
$3,000 (origination fee) + $3,000 (points) + $18,000 (interest) + $2,000 (other fees) + $1,000 (closing costs)= $27,000
In this scenario, the borrower pays around $26,000 in costs in addition to the original $150,000 loan price for a total loan cost of $177,000.
What Costs Go Into a Hard Money Loan?
To fully understand the cost of a hard money loan, it’s essential to know the various components that go into the overall expense. Here are some of the main costs that go into a hard money loan.
- Interest Rates- Hard money loans have higher interest rates than traditional loans, typically ranging from 8% to 15%, depending on the lender.
- Origination Fees- These fees are typically 1% to 3% of the loan amount, and the lender charges them to cover the costs of processing the loan.
- Points- Points are upfront fees charged by the lender. Typically, 1 point equals 1% of the loan amount, and borrowers can expect to pay 1 to 5 points at closing.
- Appraisal Fees- Lenders generally require an appraisal, which can range from $300 to $1,000, depending on the property type and location.
- Underwriting Fees- Some lenders charge underwriting fees for reviewing and approving the loan application, ranging from $500 to $2,000.
- Legal Fees- Legal fees cover the cost of preparing loan documents and contracts and can range from $500 to $2,000.
- Closing Costs- Closing costs generally include title insurance, escrow fees, and recording fees, which can easily add up to $1,000 or more.
- Prepayment Penalties- Some lenders charge a fee if the loan is paid off early to recover some of their expected interest earnings.
It’s important to note that every lender is different. Some may have different charges than others, and these are just some examples of what a lender may charge when distributing funds for a hard money loan.
How to Calculate the Cost of a Hard Money Loan
Now that we’ve gone over what expenses contribute to the total cost of your hard money loan, you may be wondering–what’s the total cost of one? Here’s a basic example of calculating the cost of a hard money loan.
Step 1: Start With the Loan Amount
Determine how much you want to borrow. For this example, say you’re taking out a $150,000 loan.
Step 2: Add Interest Costs
Most hard money lenders charge 8% to 15% interest. So, multiply the loan amount by the interest rate to find your yearly interest cost, then divide by 12 for the monthly interest.
If your loan amount is $150,000 and the interest rate is 12% annually, it would look like this.
- $150,000 x 12% = $18,000 yearly
- $18,000/12 = $1,500 monthly
Step 3: Add Origination Fees
Most lenders charge 1% to 3% of the loan amount for origination fees.
- $150,000 x 2% = $3,000 origination fee
Step 4: Add Points
Lenders may also charge points, with 1 point equalling 1% of the loan amount. Borrowers typically pay 1 to 5 points upfront.
- $150,000 x 2% = $3,000 points
Step 5: Add Appraisal, Underwriting, and Legal Fees
Additional costs vary by lender but may include the following.
- Appraisal fees: $500
- Underwriting fees: $1,000
- Legal fees: $500
Total: $2,000
Step 6: Add Closing Costs
Closing costs, including title insurance and escrow fees, can add $1,000 or more to the total cost of the loan.
- Closing costs = $1,000
Step 7: Add Prepayment Penalties (If Applicable)
If you want to repay the loan early, some lenders charge prepayment penalties. For this example, let’s assume there are none.
Step 8: Calculate the Total Cost
- Interest: $18,000
- Origination fee: $3,000
- Points: $3,000
- Appraisal, underwriting, and legal fees: $2,000
- Closing costs: $1,000
Total Costs = $27,000
$150,000 (loan amount) + $27,000 (costs) = $177,000
Can You Negotiate With Your Lender to Lower Costs?
Yes, you can generally negotiate hard money loan terms to find the best deal possible for both you and your lender. However, every lender is different, so some may be more willing to negotiate than others. That said, the first step is finding an experienced lender willing to work with your unique investment circumstances.
Once you’ve found a flexible lender, you’ll want to prepare all the documentation you need for the loan. This typically includes your financial history, credit score, and any other assets you have. Additionally, you’ll need detailed information about the property and any renovation plans you have for it. Having this ready shows that you’re prepared and experienced with getting real estate loans.
Lenders want to see that your transaction is worth their risk. So, before asking them to lower their interest rate or offer more favorable terms, you’ll have to prove the value and viability of your project. For instance, you’ll want to back up any claims you make about the property’s value with real numbers and data. You can better negotiate with them once you’ve given them the information they need or want.
Find a Loan That Works for Your Investment Today
Knowing the full cost of a hard money loan can save you from any surprise costs down the road. With that, it’s important for investors to understand that hard money loans are generally more expensive than traditional loans due to their convenience and short loan terms.
If you’re looking for a hard money lender for your next short-term real estate project, look no further than Maryland Hard Money Lenders. Our team of real estate loan professionals can work with you to find terms that meet your unique project needs. Contact us to learn more about our lending process, or fill out our initial loan application today.