Amortization for private money loan

14 Replies

Hi all I am looking at different options regarding financing my first deal. I fully understand how an amortization schedule looks for a conventional loan but how about for a private loan? Is it a lump sum set percentage payback or is it say 10% over 12 to 36 months? Do private money lenders offer just a lump sum payback?

@Zachary Beauchesne Great question! The terms will depend on the private lender but the concepts are the same - amortization period, interest rate, points, ballon payment, etc. 

Once you know the terms, then you (and hopefully your lender) can put together the repayment schedule. 

@Cameron Tope thank you for your response and expertise! So I should be building my financing in to the deal from the start including any hard or private money lending with the hopes of refinancing and paying the loan back. I guess I’m curious about the incentive for a lender if I am able to pay it back within a month as opposed to a year. It’s hard for me to grasp the concept without seeing it on paper. I appreciate your insight!

The numbers work Exactly like a traditional amortized or interest only loan, whichever you guys agree on....it is an Annual percentage rate, not a lump sum.  Most private lenders will have a minimum length of time the loan will earn interest....they have little interest in making a loan that will only last for a month or two. 

Thank you Wayne! Makes sense, seems like I was over thinking the whole thing. Pretty straight forward. Maybe the next question I should be asking is where are the private money lenders at willing to invest in a newbie working on putting together his first deal. 

Originally posted by @Zachary Beauchesne :

@Cameron Tope thank you for your response and expertise! So I should be building my financing in to the deal from the start including any hard or private money lending with the hopes of refinancing and paying the loan back. I guess I’m curious about the incentive for a lender if I am able to pay it back within a month as opposed to a year. It’s hard for me to grasp the concept without seeing it on paper. I appreciate your insight!

Zach,

Usually the lender will have a minimum term for interest (about three months) or they make enough on the points up front that they don't care when you pay it back. 

Hope that helps!

 

I structure my deals as 100% funding. 2 points, 12%. 6 month term. 90 day minimum interest (prepayment penalties are illegal in WI). 

Sample deal:

$50k purchase. $50k rehab. $100k loan. 

Interest calculation: .12/360*100,000= $33.33 daily interest. 

Points: $2000. 


If the deal takes 120 days, I would pay back $100k plus 2 points plus (33.33*120) $3999.60


hope this helps 



12% with 6 month term and 90 day minimum is harder money than most hard money loans these days.  A good mortgage broker can set you up with some way better hard money financing.  Lots of private money is doing 12 month terms around 8-10% these days.  2 points is still pretty standard in hard money.  I just attended a conference in Vegas where there were all sorts of new hard money lenders I'm looking at signing broker agreements with because they are starting to really open the box and compete these days.

Originally posted by @Zachary Beauchesne :

@Cameron Tope thank you for your response and expertise! So I should be building my financing in to the deal from the start including any hard or private money lending with the hopes of refinancing and paying the loan back. I guess I’m curious about the incentive for a lender if I am able to pay it back within a month as opposed to a year. It’s hard for me to grasp the concept without seeing it on paper. I appreciate your insight!

A Hard Money Lender will likely make their money in points and fees. If the loan profit is dependent on lender spread then there will be prepayment penalties if you decide to pay it off early.

Furthermore there is an excellent chance that your loan is no longer being actually held by that HML. There is a whole industry of note buyers who purchase mortgages. The capital tied up in your original loan will likely be reinvested back into the next loan and then the next... That way we HMLs can lend out Billions while possibly only having hundreds of Millions in capital. If you pay off the note buyer then that's great. Hopefully said note buyer will be cashed up and hungry to buy more of our notes...

Best of luck.

Originally posted by @Daniel Hennek :

12% with 6 month term and 90 day minimum is harder money than most hard money loans these days.  A good mortgage broker can set you up with some way better hard money financing.  Lots of private money is doing 12 month terms around 8-10% these days.  2 points is still pretty standard in hard money.  I just attended a conference in Vegas where there were all sorts of new hard money lenders I'm looking at signing broker agreements with because they are starting to really open the box and compete these days.

I structure my private money lenders this way because it works out better. This is 100% funding with no cash out of my pocket. No doc prep fees, escrow fees, lawyer fees, payoff fees, or draw fees, which can easily reach the thousands with just about any hard money lender. Also there is less headache and my lenders are comfortable knowing they are making a great return. 

I've learned through a few hard money loans already that points and interest are negligible when you add up the other crap. Additionally, with a draw schedule you are paying interest on money that you don't have, which is frustrating in itself. 

 

Kevin,

You're right about interest rate being a small part of the equation for private money/Non-QM; there are way too many other significant factors to really care about the rate.  Many people don't get that so I understand why you mention it, but there are also private money lenders doing all the same stuff you're talking about for lower rates and longer terms (12 months) because they understand that having just a slight edge is going to get them some business.  The non-QM space is growing at a very rapid pace right now, non-QM lenders are popping up like weeds in spring these days.  My point was to continue looking around because the landscape is changing quickly in the Non-QM territory and you can save money or get flexibility.  There is a much broader range of Non-QM products now that span a range of borrowers and lenders are trying to find niche products to attract brokers to match them with clients every day.  Sure you like the way you're setting up deals because it's working for you and most successful business owners will understand where you're coming from. I'm simply suggesting you might be able to save enough money to make it worth looking around or talking to a good broker in your state.

The world of private money/Non-QM is entirely different than Qualified Mortgages.  Lenders are doing a lot of stuff, they just have to make sure they follow the Ability to Repay standards. The knowledge about how to create non-QM products that follow ATR standards is expanding and giving rise to products with so many varying features or UW criteria it'll make your head spin.  They are opening the box on everything they can from "1 day out of BK with 680 fico" features to "2 month bank statement as income" features...

My point is that I get you that it's not about rate for non-QM; for Qualified mortgages it most certainly is about rate/fees. What it's about for non-QM is fitting the loan with the borrower. If I've got a program that someone can do with 90% LTV, 2 month bank statements for income, First time buyers welcome, 1 day out of housing event with 680 fico, 1 day out of BK with 680 fico, then a rate doesn't mean anything. Closing in 5 days vs 20 or 30 matters. Everything is a factor in the bottom line equation with a private money/non-QM mortgage and there are many lenders out there that understand this is a competition and they're coming up with better stuff all the time. If you like 100% financing and that works for you there are plenty out there competing for your business.