We briefly defined hard money loans above, but let’s unpack that definition a little more.
Hard money loans are a specific type of commercial loan, or a business loan meant for real estate transactions. But unlike other commercial loans, hard money loans are meant for short-term projects, like flipping or rehabbing properties. In some cases, they can also be used for construction.
So while most real estate loans (such as commercial mortgages) come with lengthy repayment terms and low interest rates, hard money loans don’t. In fact, they tend to have very high interest rates and very short loan terms.
For example, you’ll often see commercial mortgages that offer a 5% rate on a 30-year loan. But a typical hard money loan? Think more like 9% interest on a 1-year loan.
There are a couple reasons for those higher rates and shorter terms.
First, you’re likely getting a loan on an investment property that a traditional lender wouldn’t touch with a 30-foot pole. In order to get a bank loan for real estate, the property usually needs to be in pretty good condition―in other words, bank loans aren’t ideal for flipping. Since hard money loans get used on less-than-ideal properties, the risk is higher for the lender, and the higher interest rates reflect this.
Second, hard money loans are used primarily for flipping properties. Most borrowers plan to pay off the loan as quickly as possible, either through selling the property or through refinancing with a better loan. As a result, hard money loans have very short terms.
That said, hard money loans have some key advantages. Like we mentioned, you can use them to fund properties that most lenders wouldn’t even consider.
And hard money loans usually have much faster funding turnaround times than conventional loans. A commercial mortgage can take weeks to fund, while a hard money loan can get funded in just days.
Still sound interesting? Then let’s dig deeper into the details of hard money loans.