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Your Guide to Calculating Hard Money Loan Interest Rates

Hard money loans are a great way for real estate investors to gain access to capital quickly, allowing for an edge in the ever-demanding rental market. Unlike conventional loans, hard money loans rely on the property itself as collateral, and thus do not rely on a person’s individual financial history as much as other forms of loans. Hard money loans are often used to secure properties, renovate, and pay for other expenses incurred in renewing and flipping homes for real estate profit. This, along with the flexible terms of a hard money loan often means lenders ask for higher interest rates due to the risk associated with this loan form. In order to see whether a hard money loan can work, it is important to know how much the hard money loan interest may be and prepare a repayment plan for the potential lender.


Although a hard money loan has a higher interest rate – normally 8-15% – the borrower ultimately pays less in interest than they would when it comes to a conventional loan. This is due to the shorter amount of time in the loan repayment period. Paying a higher interest rate over a year span, compared to a lower interest rate over a 30-year period will leave more capital available to pay for the principal loan.


Best Practices in Calculating Hard Money Loan Interest Rates


When calculating potential hard money loan interest rates, it is important to keep a few factors in mind.


  • Credit: Although hard money loans may not require as stringent of a background check, it is always advisable to boost credit where possible. In the months before applying for a hard money loan, boost credit so that you are more viable to lenders.
  • Down Payment: Another factor to consider is the LTV, or loan-to-value ratio. This is the value of the property versus the loan amount. A higher down payment will signify to lenders that the borrower will be less likely to default on the loan payment.
  • Repayment: If a borrower seeks to lower interest rates with hard money loans, it is advisable that they have a record of paying back lenders in a timely and complete manner. Of course, if this is the first hard money loan, this will not be possible. However, it is important to recognize that how the borrower pays back former loans can impact the interest rate.


What are the Best Interest Rates?


The current interest rates stand at 8-12% for hard money loans. This is due to the risk incurred, along with the shorter repayment period (from 6 months to 2 years on average). Therefore, expect higher rates with hard money loan interest. The best interest rates normally occur when the borrower has a higher down payment and a positive history of repayment.


How Can Interest Rates Vary?


Along with personal factors, interest rates vary due to the type of loan. For private loans, interest rates tend to hover around 8-10%. For commercial loans where business owners leverage their property as collateral, interest rates can be as high as 12-14%. The type of property has an impact on potential interest rates.


How to Manually Calculate Loan Interest Rates


To pay back a hard money loan, the structure is very similar to paying back a conventional loan. However, a borrower is only required to pay the interest on the loan in monthly payments. The principal must be paid upon the loan’s repayment.


To calculate the total interest of the loan, there are 3 factors to consider:

  1. The total principal of the loan
  2. The interest rate being charged
  3. Length of loan via years for repayment


For example, you can take the total principal x interest rate x length = total interest paid on the loan. This will allow borrowers to calculate the anticipated total for the loan on the property, and see whether the investment is worth it in the long run. Online calculators are one way to put information and generate potential interest rates on property values.


For those looking for real estate portfolio expansion, a hard money loan can be a great tool to secure a property, especially without as many underwritings as a conventional loan. However, calculating interest rates is an important part of this hard money loan repayment plan. This shows how much is needed to effectively pay back the lender, and is the basis for crafting a successful exit plan for property renovations.


If you are seeking a hard money loan and looking for the best interest rate, hard money lenders are often the best source for accurate interest rates. Accurate interest rates are a critical part of successful repayment. Therefore, it is best to take the guesswork out and allow hard money lenders to provide the interest rate upfront.

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