How do do Hard Money Loans get paid off?
-You pay off the interest from the loan monthly and then have a balloon payment with the amount the load was given.
Example: I get a 100k 18 Month loan at a 15% interest rate (115k total 100k loan 15k intrest). So I pay $833.33 a month (15k/18mon) and 100k at 18 months?
Bonus Question: I always hear that the normal seasoning period for a Re-Finance is 12 months and I also hear that most Hard Money Loads are for 12 months. Doesn't that guarantee that you will be late on paying off the loan because you wont get the Re-Fi until after the loan is due?
Hard money loans are most commonly used for fix and flips, so in those cases the loan would get paid off when the property gets sold. But in the event you were going to hold a property long-term that you bought with a hard money loan, you’d need to refi out of it and pay it off before the loan’s term is up (12 months or whatever it is).
You can generally do a rate/term refi whenever. But if you're trying to do a cashout refi or use a much higher ARV than your purchase price, then some lenders will require a 6 month seasoning.
Lastly, up until you payoff the loan or refi out of it, most hard money loans require interest-only monthly payments. You alluded to this, but you did the math wrong.
Using your numbers of a $100k loan at 15% interest rate, the monthly interest payment would be $1,250 (not $833.33). The way you figure it is $100k x .15 = $15k/12 = $1,250. (You divide the total interest by 12 because that’s how many months are in a year and it’s an annual interest rate. Doing so gives you the monthly interest payment.)
Hope this makes sense.
@Emery Taber 15% interest rate is annualized. So your calculation should be $15,000/12 months.
Seasoning period for Cash-Out refi is 6 months. You want to make sure hard money loan doesn’t have “Pre-payment Penalty” Within the first 12 months.
Secondly, if just wanting to pay off the hard money loan, you just need a rate/term refinance. This has no seasoning requirement.
@Kyle J. Okay so if I was doing a BRRR deal I would cash out refinance after 6 months, ~70% ARV and pay off the Hard Money Loan? Also, so regardless of the loan length you divide by 12 because loan interests are based annually?
Hard money loans get paid off when you sell the property on a fix and flip situation. If it’s a Buy & hold the Hard money higher loan rate will get paid off during the refinance phase when you replace it with a lower rate bank loan.
Best of luck in all your endeavors.