HML question - Why can't i think straight???

Question

Please help my brain fog!! When using hard money ... say the HML wants monthly interest only payments.  Do you have to also pay 'mortgage' payments to someone else, insurance, the utilities OOP? Or does this get paid out of the funds received from the HML?

Like if the HML gave 100K for the deal, they hold it in some sort of escrow right.. that's how they control the draws right? So if they are holding the 100K, the purchase price (say 70K) would come out of that right?

My brain can't get past this! Ugh! Do you pay the monthly interest on top of the mtg, ins, utilities?

I remember reading about calculating the holding costs in your MAO formula by J. Scott but i don't have the book with me right now and can't remember if he said calculating the mortgage part of the holding costs was only if paying with a conventional loan.

Please help! Thank you in advance.

Wayne Brooks · Answer

The HML monthly interest payments IS your mtg.

Adam Gollatz · Answer

Hi Erin,

I hate to give the generic answer, but it will depend on the specific situation. Generally speaking, if you borrow 100K (70k for the purchase 30k for repairs/upgrades) what will happen is this: To close they will require proof of 1yr homeowners insurance to be paid, eliminating the need to escrow it because HML are short term solutions they will probably require it to be paid back within a year. At closing, they will give you the 70k you will pay the down payment, any loan points, and the effective daily interest rate for the remaining days left in the month. Youll start rehab and work out the details of the escrow and getting the 30k out. At the end of the month (assuming you pay your interest in arrears) you'll be required to pay the interest on the full 100k, even if the 30k is sitting in escrow still. So if your interest rate is 12% a year, thats 1% a month, or 1000 dollars you'd pay back to the HML. As for the utilities and any other expenses, you would likely have to pay those out of pocket.

I hope that helps. Send me a message if you want to discuss more.

-Adam

Account Closed · Answer

I'll add one thing.  Your HML should not be charging interest on undrawn funds.  In other words, initially, you should be paying interest on the $70K.  Then, each time you make a draw, the actual loan balance goes up and you pay interest based on this new balance.  I guess there could be lenders who charge interest on the entire commitment, but I would steer clear of them.

Erin Elam · Answer

Thank you Adam and Wayne! I figured I had way over-thought that haha.

HML question - Why can't i think straight???

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