BiggerPockets

Why do the interest rates charged on hard money loans vary so greatly from one State to another? Borrowers ask me this question all the time. For example, in California rates charged on hard money loans start as low as 9%, versus rates starting at 14% in New Jersey. But why such a wide difference in interest rates charged between these two States?

Unlike mortgage interest rates that are governed by specific factors, interest rates in private money are largely influenced by supply and demand as well as other unique factors. One of the biggest factors is related to "the going rate on the street," which is the interest rates that other hard money lenders are charging in that particular City or State. This is likely the best reason for why hard money interest rates on the East Coast are so much higher than interest rates charged on the West Coast.

Because this is an active discussion, please share your thoughts on this topic. We would like to hear from you!

Absolutely right! Great to see a market less manipulated, where the rate actually tells us something!

@John Thedford,

Actually I'd rather owe the IRS than owe on a credit card. http://www.irs.gov/uac/Newsroom/Interest-Rates-Remain-the-Same-for-the-First-Quarter-of-2013

Where they get you is the penalties!

-Steven

1. Different risk factors. Some hard money lenders lend soft - hard money, use credit scores, cash flow coverage, etc. Others (so as myself), are true hard money lenders, the asset alone is the basis of the credit decision. The more risky the loan, the higher the rate.

2. Availability of money vs. demand for money at any given time in any given area.

3. Types of property financed, i.e. higher fees on single use commercial than on residential.

4. Ease of foreclosing - much longer foreclosure process in judicial foreclosure states than non judicial foreclosure states.

5. Outlook for real estate prices - lending get easier and cheaper if prices are increases as increasing prices cover many lending errors.

@John Thedford,

I hate paying interest. One of the smartest things I ever did was get all of my bills autopaid through my credit card with no less than 2% cash back. I cut ALL of my bills by 2%. :)

-Steven

It's not just supply and demand or perceived risk. Within each market, inefficiencies drive rates as well.

How many posters to this board have written about the private lenders they are able to borrow from at below market rates? Similarly, how many posts do we read desperately asking how to find private and hard money lenders?

If it were easy for borrowers to find lenders, and vice versa, rates would be much lower and more consistent.

Not sure how true this is
and also I'm not expert in this topic ( disclaimer )
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Short story , I was at local REI meeting earlier today
Conversation was regarding private money

It was discussed that individuals our getting
private funds ( 6 - 8% ) then taking those funds
and offering separate loans to another investors
as a hard money rates (14 above % )

Pocketing the differences on positive transactions

Important - I know there laws about distribution
private and hard money loans

Here how I visualize individuals our performing this type of funding:

Sub1 - person who offering original private money ( IRA / etc )

Sub2 - let name Johhy B Nasty ( middle guy )

Sub3 - person looking for funds , but have no credit / exper. / etc

Possible transaction :
==============================================
Sub2 - borrow money from Sub1 at 7% for 9 months
Sub2 - borrow new obtained funds to Sub3 at 14% for 7 months

Sub3 - completes rehab, market property, &sell to new home owner

Sub3 - pays back Sub2 original loan amount + interest used
( 14 % + rate )

Sub2 - immediately pays back Sub1 + interest used ( 7% rate )

Sub2 - made interest off of Sub3 rehab deal basically
( the interest rate difference )

Everyone happy -> sub1 , sub 2, and sub 3

Again~I know their laws & licensing for offering private/hard funds

I would doubt that would work very well, it would be an unsecured loan with no safe exit strategy. Due diligence by the original lender would have to be non existent, maybe a lender who was family and trusted you would loan on blind faith, but I never would.

Just my opinion.
Rick

@Ann Bellamy Thank you for your reply. I always like to get answers from real life 'experts' in the field, that actually work in the business related to the questions. I know there are many people that set themselves out as 'lenders' 'hard money lenders' 'private lenders' etc., when in fact they aren't. BP members trying to find answers need real information from reliable sources that actually make loans, so that they can make informed decisions on their investment strategy, and whether or not it is viable, etc., and you are a great source.

The fact you put your rates etc. out for everyone to see is a testament to your integrity Ann. I know many people don't understand that just because someone is a hard money lender, that the deal still has to make sense, and if they lack skin in the game, they need experience, or credit scores... etc., and the rates charged are relative to the risk taken.

Hard money plays an integral part in the business of real estate, and it's good for BP members to be able to understand it, and the value it has in certain circumstances.

@Sabrina Laplante

Most licensed HML in AZ are in the 16-18% range with a $900 loan origination fee. If you go private you can get better rates and terms but they are much harder to find.