Hard money loans are effective tools to leverage in a competitive buyers market. As a quick, efficient way to raise capital for real estate investment, hard money loans can be a competitive tool for those seeking to expand their investment portfolio. As hard money loans are structured differently than conventional loan forms, an important piece of effectively utilizing the loan is the repayment plan. As hard money loans can go towards a myriad of opportunities – from property purchases, to renovation of distressed properties, to contractor fees, there is no one way to schedule a repayment. Rather, it is important to see which one serves your needs in the process.

 

Hard Money Loan Repayment Basics

Hard money loans are structured differently than conventional loans. Conventional loans typically stretch for 30 years, while hard money loans are accelerated and typically take 6 months to 2 years for repayment. Once the principal is paid, borrowers have higher financial freedom as they continue to invest. Another difference from conventional loans is that most times, a borrower will only be required to pay back monthly interest on the loan. The total loan principal must be paid by the time the loan’s cycle is complete. With this in mind, expect higher interest rates on the loan itself. Hard money loan interest rates can range from 8 – 15%. However, JMJ’s hard money rates rest between 7.5 – 9%, making it competitive with the conventional loan rate of 5.5%. Leveraging hard money properly can ensure this is a great tool.

Best Loan Repayment Practices

Not all loan repayment plans are the same – read below to find the one that may work in your favor.

1. Interest Payment: The most important thing to consider is how you will pay the interest. As a hard money lender does not require payment on the loan principal until the end of the loan’s cycle, ensuring that the borrower pays interest on time can add to the borrower’s creditworthiness and keep from loan default.
2. Selling the Property: One of the best strategies for those looking to flip houses is ensuring the house is sold by the end of the loan cycle. A hard money loan grants borrowers the advantage of buying distressed properties quickly, and can also be used to renovate the property for a profit. Knowing the repair value of the property (or value after renovations) and the buyer’s market are crucial steps to an effective sale on the loan’s timeline. Making sure that the property is sold requires stringent planning, which comes with a solid exit strategy.
3. Loan Transition: If this property is an owner-occupied property or commercial, a quick sale may not be the route for all borrowers. In this case, it is possible to transition to a different loan form. If you qualify for a traditional loan after securing the property with a hard money loan, conventional loans can grant a longer repayment period for a property.
4. Mortgage Refinancing: Another thing to consider for those not trying to quickly sell the property is to refinance the mortgage. Owner-occupied properties may allow you to purchase the property, then refinance the mortgage to offset the interest rate.

Ideal Loan Repayment Timelines

A hard money loan exists on a different timeline than traditional loans. Finding out the correct timeline is crucial for proper repayment. For those who want to turn a profit on their property, a shorter holding time means that the loan can be paid off quicker for new investment purchases. Below, find an example of an ideal timeline for loan repayment. For ease, the example amount is $100,000.

 

Example 1:

Hard Money Loan Amount: $100,000

Interest Rate: 10%

Loan Terms: 24 months

Holding Time: 12 months

Monthly Repayment: $833.33

Total Interest Paid: $10,000

 

Example 2: 

Hard Money Loan Amount: $200,000

Interest Rate: 7.5%

Loan Terms: 24 Months

Holding Time: 24 Months

Monthly Repayment: $625

Total Interest Paid: $15,000

 

Bottom Line

Whether looking to flip a home for a quick sale or occupy the property for commercial or residential use, a hard money loan can be a great tool to secure the property of your dreams. Effectively managing the repayment on a timeline that makes sense for your financial goals are some of the best ways to foray into real estate investment, and develop strong credit as well.