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Loan, Real Estate

How a Step Rate Loan Can Help Your Hard Money Journey

26Hard money loans are some of the most flexible loan forms for potential real estate investors. As loans that rely on property as collateral, rather than personal financial history, they can be easier for borrowers to obtain and use for their purpose. Another asset to hard money is the flexible terms that can accompany this loan form. Since you are not relying on a big bank with a stringent underwriting process, small companies and private investors are much more likely to provide terms that work with your repayment plan. One way to consider utilizing hard money loans is through the step rate process, which depending on your hard money usage can be perfect for utilizing your hard money loan.


What is a Step Rate Loan
In the normal loan process, there is a set interest rate that borrowers are expected to pay for throughout their loan duration. A step rate loan differs in that the lender and borrower agree to a lower interest rate during the introductory period. After this introductory period, interest rates will increase on the loan payment. Typically, the lender and borrower work together to construct the period of time the introductory loan form will stay in place. After this, the borrower can expect a higher interest rate for the rest of the repayment plan.


What are the benefits of a step rate loan?

Step rate loans are unique in that they provide an opportunity for the borrower to pay a lower interest rate for the beginning of the loan term. For hard money loans this is especially helpful as typically, the borrower only has to pay the interest on the loan during the repayment period. Here are some ways that step rate loans may help your real estate goals:


  • House Flipping: If you are someone who is looking to get into the house flipping game, step rate loans may be your ticket. Due to the smaller interest rates during the renovation process, cash flow can be utilized for other purposes such as construction and renovation. Having extra cash available in the beginning stages of a home flip can be crucial to turning a distressed property into a profit.

  • Accessible to Borrowers: Since the hard money loan is structured so that borrowers initially only pay off the interest during the repayment period, having a lower initial interest rate can make step rate loans accessible to first-time borrowers. If you are someone who does not currently qualify for traditional loans, this step rate advantage may help you qualify for a hard money loan.

  • Interest Rate Fluctuation: It is possible that during the introductory period, interest rates may go down, providing flexibility for the borrower. This means that the borrower is not locked into a singular rate for the duration of the loan.


Things to Consider


As with any loan form, it is important to have a repayment plan and exit strategy if you are renovating a property. Step rate loans can be useful tools, and provide loan access for nontraditional qualifiers. In order to build the positive credit you need to continue on your real estate journey, having a repayment plan that makes sense for your needs is key.

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