Can someone explain the interest rates for hard money?

Question

So when you get a loan from a hard money for let's say 200k with a 12% interest.

1. If I paid it off the next month do I still need to pay that interest?

2. How does interest work like does it go away if I paid for the whole thing. for example like a membership you would get a good deal if you paid annually.

Curt Davis · Answer

The interest is annualized so what this breaks down to is 1% monthly interest-only so you would pay $2,000 to the private lender for that one month of use. Also, most hard money lenders charge a loan origination fee, usually in the 3%-5% range. This usually comes off the top of the loan so in your example if they charged on the low end of 3% they would have collected $6,000 at closing taken out of your total loan amount so you would have a $200k loan but only received $194,000.

Good luck!

Michael Kinsella · Answer

Hi @Fahadbin Alam,

1. It depends on the terms of your loan. Some hard money lenders have a prepayment penalty; if you pay the loan off early, you are charged a premium. Some lenders have a minimum interest amount; you need to pay a minimum $ amount of interest, regardless of timing of the payoff. Some lenders have no prepayment penalty at all.

2. Interest payments are typically made monthly, and most hard money loans don't amortize (because of their short-term nature). What this means is that you will be making interest-only loan payments, as opposed to paying interest and paying down the principal simultaneously.

Hope this helps,

Michael

Michael Glist · Answer

So I think this will depend on what type deal you are looking at financing.

Are you looking to finance a fix & flip or would this be a rental property?

What is the need of the hard money?

Will it act as a bridge loan to help you initially acquire the property while you get the long term financing in place?

This can change things as they are different loan and some will come with a prepayment penalty and some will not depending on what you are looking to do.

But either way if you were to pay it off the following month you would not still have to pay interest, but depending on what loan type you are doing you may have to pay a prepayment penalty.

Wayne Brooks · Answer

@Fahadbin Alam Most HML’s will have like a minimum of 3 mo.s interest to be paid....pay it off in 1 mo, or 3 mos, you pay 3 months of interest.

Fahadbin Alam · Answer

@Michael Kinsella Still a little confused. Because let's say I buy a house using the BRRRR strategy and used a hard money lender. After I do that and I refinance the property, and let's say I borrowed 200k. And after I refinance do I then also have to pay a little bit more of interest or just the premium? because let's say it's 12% interest and that's about 25k. And you said it's monthly so if I divided that by 12 it would be a fee of 2k a month but If i gave all that money back in the 3rd month do I still need to pay off the total 25k interest?

Jason Wray · Answer

Most hard money lenders have a 2-3 year prepayment penalty. Meaning if you pay it off in less than 3 years you will be charged a cash penalty. Could be a set amount or 2-3% of the purchase price added to the payoff. The best way to handle a hard money loan if you do not qualify for a traditional loan is to refinance out of the loan after the prepayment or sooner if you do not care about absorbing the pre-pay into the refinance loan.

Can someone explain the interest rates for hard money?

Can someone explain the interest rates for hard money?

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