The True Cost of Hard Money: Tips for Borrowers

Hard money loans are an excellent way for investors to obtain funding quickly for a real estate investment. However, if you’re a new investor, you may only pay attention to the benefits instead of the costs. Today, we’ll go over how hard money differs from traditional loans, the process of getting a loan, and the true cost of hard money loans. Read along as we discuss whether hard money loans are worth it or not. 

Contents of This Article: 

• How Do Hard Money Loans Differ From Traditional Loans?
• What’s the Process of Getting a Hard Money Loan?
• The True Cost of Hard Money for Borrowers
• Are Hard Money Loans Worth It for Borrowers?
• How to Find a Trusted Lender Near You

How Do Hard Money Loans Differ From Traditional Loans?

If you’re familiar with real estate investing, then you know that there are several ways to fund a property. For instance, you could buy it outright, use a traditional mortgage loan, or seek alternative financing, like a hard money loan. But what are the differences between loan types? 

Traditional mortgage loans generally come from a bank, credit union, or other large financial institution. Lenders will look at several factors, like your credit score, income, debt-to-income ratio, and more. 

On the other hand, hard money loans are typically provided by private individuals or small lending firms that use their own capital to lend to borrowers. That said, approval for a hard money loan is primarily based on the property’s collateral. 

Interest rates and loan terms are another difference between the two. Traditional lenders generally offer lower interest rates, especially if you have strong creditworthiness. However, due to increased risk for hard money lenders, these loans may have higher interest rates. 

Finally, hard money loans have shorter terms, usually ranging from a few months to a few years, as they’re often used for short-term projects or bridge financing. On the other hand, traditional loans have much longer terms–sometimes up to 30 years. 

Next, we’ll go over the process of getting a hard money loan and the true cost of hard money.

What’s the Process of Getting a Hard Money Loan?

Generally, hard money lenders’ requirements are more straightforward than those of traditional lenders. You’ll still have to apply with information about you and the property you’re interested in, but typically, the process is much quicker. 

Once you find a lender, you’ll want to gather the necessary documents and submit your loan application. Then, your lender will likely appraise or evaluate the property to determine the current market value. That way, they can better understand the collateral’s worth. 

From there, your lender will thoroughly review the property, your qualifications, and your proposed project. Then, if they’re satisfied with the due diligence, they’ll approve the loan and send out the necessary paperwork. Once both parties accept the terms and conditions, a closing date will be set, and the funds will then be distributed. 

The True Cost of Hard Money for Borrowers

While the process of getting a hard money loan seems quick and easy, it’s important not to overlook some of the additional costs. Compared to a traditional mortgage loan, you may end up spending more on interest, fees, and other costs for a hard money loan. Here are some of the true costs to consider when it comes to borrowing hard money loans. 

• Origination Fees or Points- Hard money lenders often charge an origination fee, which is a percentage of the total loan amount, typically ranging from 1% to 5% or even higher. Additionally, lenders may charge “points,” where one point equals 1% of the loan amount.
• Processing and Underwriting Fees- Many lenders charge a fee to process the loan application and documentation to underwrite the loan. However, rates may vary depending on your lender.

• Monthly Interest- Hard money lenders often charge higher interest rates compared to traditional loans. You can expect to pay around 10% to 15% interest rates for hard money loans.
• Construction Loan Costs- Some borrowers also take out a construction loan with their hard money loan, depending on their investment strategy.
• Servicing Fees- Some lenders charge servicing fees to cover the cost of managing the loan, including tasks like collecting payments, providing statements, and handling administrative work.
• Pre-Payment Penalties- It’s important to look at the fine print for fees charged for paying off your hard money loan early. Some lenders charge a pre-payment penalty, although not all of them do.
• Late Fees- If you fail to make your monthly payment on time, some lenders may charge a late fee. Unfortunately, these fees can add up over time and increase the overall cost of the loan.

Are Hard Money Loans Worth It for Borrowers?

Ultimately, deciding whether a hard money loan is worth it or not depends on your investment strategy, goals, and ability to obtain a loan. For instance, if you’re looking for a quick fix-and-flip project, then a short-term hard money loan may work great for that investment type. However, if you’re looking to finance a long-term rental property and have the proper criteria to meet a traditional lender’s requirements, you may save money going that route in the long run. 

How to Find a Trusted Lender Near You

If you’re thinking about investing in real estate, it’s important to know and understand all of your borrowing options. Now that we’ve gone over the true cost of hard money loans, you can make a more informed decision about how you’d like to fund your investment. That said, hard money may be for you if you’re looking to secure a quick deal and want to bypass the strict underwriting criteria of a traditional loan. 

Finding a local lender is the first step in funding your next real estate project. That said, if you’re in the Maryland area, consider working with Maryland Hard Money Lenders. Our team of industry professionals can help you get funded fast. Check out our initial loan application and learn how we can help you today!