Hard Money Loans – Short Term Mortgages
Hard money loans are capitalized by unconventional lenders who lend money out on the condition of real estate security. Their prime goal is make as much money as possible from the borrowers who cannot get approved by a bank. Some would call this dirty pool, and there was day when this kind of loan was illegal. I would not go as far as to call it loan sharking, but I would certainly call it predatory.
Now don’t take me wrong – there is a time and a place for hard money loans in the market. When the banks will not budge on financing a business for their growth, start-up, or relocation, they can get the money they need by leveraging their real estate assets. Businesses can also pay for the interest from their hard money loans via tax breaks. They can write-off a specific portion (depending on the state, the nature of their business, and what they need the loan for) of their interest payments while they are in the term of the loan. Not bad if the business is sound and liquid. This is why hard money loans are common practice in the United States and Canadian financial community.
I would hedge against getting a hard money loan for the purpose of a personal property. You home residence is a long-term investment and you should never be paying hard money interest rates for a long-term mortgage. Easy to say, and it’s easy to do – just don’t do it unless there are mitigating circumstances whereby you HAVE to do it. If you do decide to mortgage your personal residence on a hard money loan, make sure you can make your payments on time, and make sure property is extremely sound. You are better off renting than using a hard money mortgage.
Hard Money Loan Lien Status and Interest Rates
Another thing that hard money lenders do is insist on having “first lien status”, meaning that if any liens are on the property, when it sells they get their money first. Another thing hard money lenders do is charge big interest rates, ranging from 10%-22%, and this the norm in all states and provinces in Canada and the United States. Pretty ugly right? As I mentioned above, if you can write-off the majority of your interest Bob’s your uncle (no, I don’t know anything about the U.K. hard money market.)
As the title suggests, you want your hard money loan to be a short term solution. Bank rates don’t apply to hard money financing like everything else – the interest rates mentioned above are based on the current state of the real estate market in which the property is in.
Hard Money Loan Default Rates
The “default rates” associated with hard money loans are brutal. The lenders cannot charge more Interest than regulated by law, so the highest rates you will see in the hard money market are 25%-29%. Wanna buy a house with your credit card? Nope. So if the borrow is unlucky enough (or unwise enough) to miss a payment, they’re going to be on the hook for some big vig.
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