Closing Costs, Refinancing, and Hard Money Lenders

4 Replies


I have read on a lot of posts, people take out a hard money loan, get the home ready to rent or flip, then refinance the home loan.  I may have mistaken some of these posts, but when you pay the original closing costs for the home and then refinance within a year to two years - or less, doesn't that cost a lot?  Meaning - I have heard if you can't drop your mortgage by a point, preferably 2, it isn't worth refinancing due to how long it takes to recoup fees)

I am trying to find out I guess what are the disadvantages to hard money loans; I am assuming because they are at a higher rate, that is why people refinance.  But, I don't have my 20% down, I can't live in one part and rent the other - I already have a home.  I don't have any relatives willing to give me money.  I could take a down payment out of my employer sponsored 401K, but that is going to cost me a lot given that is 22-30K I am not making money on in my 401.

I want to understand the fee structure better of what this all looks like when doing a hard money loan to get into your first home.

2-4% of the loan amount in lender fees is typical for a HML, depending on experience level etc. That's cash out of pocket. HML typically require a little less down than Fannie, however, which kind of makes up for it. Except that down payment is equity you get back when you sell, that same $ paid out in HML fees is money you don't get back when you sell.

Almost everyone refinancing rolls the closing costs into the loan balance. So that's not cash out of pocket. But, again, increasing your loan balance means less net proceeds when you sell. 

In both cases, that's why it's a long term strategy. The HML and refi closing costs are going to be a huge % of profit if you sell in a year or two (part of why many new flippers fail). If you own for a decade before you sell, those same exact closing costs will be mere statistical noise, making long-term holds a more forgiving strategy than short term flipping.

Hi @Charlene Stovin.

People take out HMLs to purchase, rehab or refinance. Carrying a short term HML loan is generally expensive - e.g. the interest rates might be 10%+ interest only, so it's like a cold shower, you get in and do what you need to do as soon as possible and then get out.

When you get into a short term HML you need an exit strategy. E.g. fix the property and refinance or sell the property and pay off the loan.

Refinancing usually means a conventional loan. E.g. a bank. Banks offer much better interest rates than HMLs. However a Bank might not lend to you for a purchase or might not do rehab or the property might not quality or they might take too long to close for that purchase you are contemplating. That is why many people use HMLs to do what they need to do and then refinance at a better rate once they can.

There are also some Hard Money Lenders such as ourselves who offer refinance into our 30 year, fixed, fully amortized HML. However while the interest rates are less than a short term, hard money loan, it is still more expensive than a bank and indeed does not pretend to compete with conventional loans.

If you don't have 20% down then my guess is that you are not ready for a HML. HML is convenient but not cheap. You will still need a down-payment (probably 10%-35% of the purchase), you will still need loan closing costs (say $6K-8K), you will still need money to carry the loan until you can exit the loan, you may still need money to rehab (at least to the first draw milestone) if you are rehabbing and you still need money for contingency in case things not quite as planned.

Hope this helps.

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@Benjamin Hurwitz, thank you; that all makes sense. This seems near impossible to get the first rental under your belt when you can’t live in it for starting out (meaning I already have a home)

Appreciate the help!!

@Charlene Stovin There are a number of other threads on BP related to this very topic. The short answer is that there are plenty of options available. i.e. Finding a partner that has down payment money, using the equity in your primary home as a down payment (HELOC), finding a seller that will offer financing, etc. All of these have pros and cons and each persons situation is different. However saying it can't be done is a "cop out".