Real Estate Tips |6 min read

How Does Inflation Affect Hard Money Lending?

Inflation is the general increase of goods and services over time. It affects all aspects of the economy, ranging from consumer spending habits to investment decisions. One area that’s particularly impacted by inflation is real estate lending, including hard money loans. Read along to learn how inflation affects hard money lending, who it impacts the most, and tips for investing when interest rates are high. 

Contents of This Article:

Does Inflation Affect Hard Money Lending?

Inflation affects every aspect of the economy, including real estate investing and lending. When inflation is high, many lenders increase their interest rates to compensate for the decreased purchasing power of money. As such, those looking for real estate loans, including hard money loans, will likely face higher borrowing costs. 

Additionally, inflation can impact the loan terms that hard money lenders set. For instance, lenders may need to adjust loan amounts, repayment schedules, or collateral requirements to account for the decreased value of money. Unfortunately, this impacts both borrowers and lenders, as borrowers may find it more challenging to repay loans, and lenders face more risk. 

Inflation can also influence the demand for hard money loans. As most investors know, real estate can act as a hedge against inflation, which may result in more borrowers looking to borrow money to invest. It can also lead to increased demand for Baltimore real estate loans as borrowers may want to act quickly before rates rise even further. 

Next, we’ll review some specific ways inflation can impact hard money borrowers and lenders. 

Effects of Inflation on Borrowers

Inflation can have several impacts on investors who want to buy real estate. Not only are interest rates higher, but depending on your investment strategy, the entire process can be more costly. However, it may positively impact your investment returns. Let’s look at some of the major effects of inflation on hard money borrowers. 

  • Higher Interest Rates- Inflation leads to higher interest rates, meaning borrowers face higher costs while borrowing from hard money lenders. After all, higher interest rates mean higher monthly payments and more total interest expenses over the course of the loan.
  • Potential for Higher Returns- Borrowers who use hard money loans to invest in real estate may find that inflation can impact their return on investment. For instance, inflation can lead to increased property values, allowing borrowers to sell their investments and pay off their loans with plenty of leftover profit.
  • Potential for Default- On the other hand, if inflation rises quicker than a borrower’s income or the value of their real estate investment, it may be harder to pay off their loan at the end of the set term. This may put them at risk of default, especially if they can’t refinance or sell the property at a favorable price. 

How Does Inflation Affect Lenders?

Just as rising costs can impact borrowers, it can also affect how lenders run their businesses. Here are some of the major impacts of inflation on hard money lenders. 

  • Interest Income- Inflation results in higher interest rates, which can increase the income that hard money lenders earn from their loans. Hard money lenders can charge higher interest rates, boosting their income and overall profitability.
  • Collateral Value- Hard money lenders generally require collateral in the form of real estate to secure their loans. Unfortunately, inflation can majorly impact the value of real estate, which may negatively affect a lender if a borrower defaults on their loan. As such, lenders should regularly assess the real estate market and adjust their terms and requirements accordingly.
  • Demand for Loans- Inflation can increase the demand for hard money loans, as many investors see real estate as a hedge against inflation. Additionally, investors may look to invest in assets that can present higher returns, like real estate projects. That said, more demand can allow lenders to expand their loan portfolios and generate more income.

Tips for Borrowing When Interest Rates Are High

When it comes to borrowing money for real estate, it’s important to pay attention to market conditions, as well as economic conditions that may impact the price of your loan. If you’re looking to invest when inflation and interest rates are high, here are some tips. 

  • Understand the Market- It’s safe to assume that before you invest in real estate, you’ve done a fair amount of research on the current market. Understanding past and current trends is important to help you assess whether or not it’s worth it to get a hard money loan. You may benefit from waiting until inflation settles and interest rates drop.
  • Shop Around for Lenders- Just because one lender has high-interest rates doesn’t mean they all will. Each lender has different criteria and loan terms, so you’ll want to shop around to find one that suits your needs. During your search, compare interest rates, fees, and terms to find the best deal.
  • Negotiate Terms and Fees- Don’t hesitate to negotiate with hard money lenders for more favorable terms. Interest rates, loan-to-value ratios, closing costs, and repayment schedules are usually up for negotiation. Even if you can’t secure a lower interest rate, you may be able to cut costs in other areas by negotiating your terms.
  • Think About Potential Risks- Borrowing money at a high interest rate can impact your ability to profit from the investment. As such, you’ll want to develop a solid plan for managing these potential risks. For instance, you may want to budget for higher loan payments or factor in more expensive renovation costs if you’re investing in a fix-and-flip project.
  • Have a Solid Exit Strategy- A solid exit strategy is one of the most important aspects of any hard money loan. In fact, most lenders are more concerned with your ability to repay the loan than your credit history or other determining factors. So, present a clear and viable plan for repaying the loan to reassure lenders of your ability to repay despite high rates.

Find a Loan That Fits Your Needs Today

Ultimately, inflation impacts everyone, whether you’re a hard money lender or an investor looking to fund a new real estate project. However, it’s important to be aware of these impacts and work around them accordingly so everyone can benefit. 

If you’re looking to finance a fix-and-flip project, rental property, or bridge the gap between loans, contact your local hard money lender. Maryland Hard Money Lenders can help you get the loan you need with quick turnaround times and reasonable terms. Learn more about our lending process or fill out our initial loan application today!

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