Over the years a multitude of labels have been
used to describe hard money loans, but they typically indicate to one and the
same thing with slight modification. You can also see hard money lenders being
called by different names like Brokers, Loan Officers, Mortgage bankers or
Agents but their basic role is all the same, i.e. getting the loan funded
quickly. If you think that you need a hard money loan you need to work with a
hard money lender who is specialized in this arena.
Why is the cost of hard money loans higher than bank loans?
One of the first questions that arise in the
mind of the borrower is the reason for the high cost of hard money loans in
comparison to bank loans or other loans from financial institutions. One of the
primary reasons is that hard money loans are funded by private investors
irrespective of the creditworthiness or financial stability of the borrower.
The cost of hard money lending is generally determined based on two factors,
one is the interest rate and the other is the upfront points (where one point
is equal to one percent of the loan amount).
·
Interest Rate
Since hard money loans Houston represent a
higher risk than other conventional lending institutions the rate of interest
is also naturally higher. In return for the risk borne by the lender, he
charges a higher rate of return. The higher the risk the higher will be the
rate of interest for such loan amount. Hard money loan rates usually start at
10% per annum and soar higher depending on the risk involved in such lending.
·
Upfront Points
The upfront point usually remains 3 points
higher than the prevailing bank offerings. Some hard money loans go even 10
points higher depending on the risk factor. These points are offered to enhance
the yield of the hard money lender. The points will also vary depending on the
loan amount. For a small loan amount, the upfront points will be typically
higher whereas for higher loan amount it will be usually lower.
One of the simplest ways of calculating the
cost of hard money loan is to consider the cost of not taking such loan. Many
reputed lending companies provide an online hard money calculator to calculate
the cost of borrowing from them.
How to minimize the risk of private money loans?
Since the cost of hard money lending is
directly related to the risk involved in lending to a specific borrower, it
should be the target of every borrower to try and minimize the risk of hard
money loans. But how do you do it? Below are a few basic tips that can help any
borrower in minimizing the risk from private borrowing.
·
Check your financial status
If you cannot afford to repay a loan, do not
apply for one. Just because it is easy to obtain a loan from a private investor
does not mean that you can pay it back. If you are financially stable it will
also minimize the risk of getting a private loan.
·
Seek references from existing
borrowers
If you can get details about a few hard money
lenders, try to find out existing borrowers with whom the lender is currently
servicing. When you are dealing with hard money loans in Houston,
you need to be more careful than working with any bank or financial
institution.
·
Check for the balloon payment
You might have the financial stability to
obtain a private money loan but you may not be in a position to take up the
balloon payment, i.e. a part payment that is required to be made to the lender
at a pre-determined time. Failing to clear a balloon payment will cause the
lender to foreclose on your collateral.
Make sure you conduct proper due diligence
before applying for hard money loan as it will provide you with returns in the
future.
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