Hard money loans are known for their higher rates of interest when compared with traditional mortgages.
However, the point of such a loan is not to provide a prospective homeowner with a long term, affordable repayment plan; instead it is aimed at people who want to buy properties cheaply and turn them around for a quick profit.
Paying attention to hard money loan rates is still sensible if you are considering the appealing prospect of property flipping. So let’s look at what average interest charges will be on this type of loan in 2022.
Hard money loans: A broad range to consider
Because hard money loans are offered up by private individuals and companies, rather than through established lenders like banks and brokers, there is less information on what specific rates are available.
However, that doesn’t mean we can’t pin down a range of averages for how much hard money lenders charge within this industry, to help guide your expectations.
At the most favorable end of the scale, loans of this variety will have annual interest rate charges of around 10%.
This sounds like a lot compared with some of the 2-3% deals that mainstream lenders have available at the moment, but it is worth noting that mortgage rates remain close to historic lows.
Towards the upper end of the spectrum, a hard money loan may be lumbered with an interest rate of as much as 18%. As an annual amount, this would obviously not be sustainable, but then that is not the primary purpose of financing a property purchase in this way, as mentioned.
The main point to take away here is that providers of hard money loans recognize that they are taking a bigger risk when handing over their cash to customers, and so the higher average rates reflect this and shield them from the fallout of a failed property project.
The appeal of straightforward approval
Getting approved for hard money loans is simpler by design. While you might struggle to get a mortgage if you have a poor credit score, this will not be an obstacle to a hard money lender. This is because the property itself is the collateral for the loan.
You’ll still need to provide a contribution towards the cost of the property you are purchasing to gain approval in this context, equivalent to a deposit on a mortgage.
This needs to be between 60 to 80 percent of the prospective value of the home once it has been repaired, so it could cover a portion of the renovation costs in addition to the outright purchase price.
Even if your finances are in good order, a hard money loan could be preferable to other forms of lending, simply because it takes less time to get access to the cash. And in a fast-moving property market, even a day or two might make a big difference. Explore your options wisely and consider the benefits of quick access to funds through money lenders in dynamic markets.
The duration of hard money loans
The short span of hard money loans also makes up for the higher rates you’ll pay to procure them. They can last as little as 12 months, and top out at around 3 years.
If you take out a year-long hard money loan at 10% interest, you’ll need to pay back a tenth of the total value of the loan on top of what you originally borrowed.
So as long as you are confident that your return on your investment in the property will more than exceed this amount, it should be a no-brainer.
The importance of property value calculations
Talking of ROI, when taking out a hard money loan, with the higher interest rates this involves, you need to balance your budget carefully and ensure that there is room to make a profit at the price you are expecting to pay for the property.
Getting valuations from local agents who know the market is sensible, because loans will be based on the expected value after repairs and renovations. If you get bad advice at this point, you could be left with an asset that isn’t worth nearly as much as you had hoped.
Likewise your management of your construction budget has to be watertight and planned in advance.
Costs for repairs and spiral if you are a novice, and this might leave you in financial dire straits if you are also beholden to repay a hard money loan at a higher rate of interest on top of this.
Finally, do remember to compare hard money loan rates, rather than just opting for the first package you encounter. You can still get a better deal from some lenders than from others in this market.
We hope you found this blog post Average Hard Money Loan Rates for 2022 useful. Be sure to check out our post Important Steps to Follow When Deciding on a Home Loan for more great tips!
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