You have options when you need a loan for your next real estate investment, whether it’s a purchase or another project. The two main options are normally traditional loans or hard money loans. Both types of loans have their own advantages and drawbacks, but one important thing to consider is the interest rate. Capital Fund 1 goes over the basics of both loan types to help you understand how and why the interest rate on a hard money loan differs from that of a traditional loan.
What Is a Traditional Loan?
A traditional loan is a basic loan from a bank or a similar financial institution. You can get a traditional loan for almost any type of large purchase in your life, like purchasing a new home, buying a car, or financing a business.
Most traditional loans use fixed interest rates. When you get a loan with a fixed interest rate, the rate stays the same for the duration of the loan. For better or worse, you’re locked in at whatever the interest rate was when you started your loan.
What Is a Hard Money Loan?
A hard money loan is a type of loan through a private lender. Instead of going to a bank for your money, choose a private lender specializing in Real Estate Projects, like CF1. Hard money loans are popular among real estate investors who want to finance the purchase of a new property or renovate an existing property. Because this type of loan comes from a private lender instead of a bank, a hard money loan interest rate is often higher than the rate you might expect from a traditional loan.
Comparing Interest Rates: Hard Money Loans vs. Traditional Loans
Many factors affect the interest rate you can expect to receive, such as the borrower’s credit history and loan length. As long as your circumstances aren’t too unusual, you can expect your loan to fall within a standard range.
The average hard money loan interest rate is considerably higher and might be as much as 10% to 18%. Hard money loans have higher interest rates for a few important reasons:
- Hard money loans typically come from private lenders. Private lenders are subjected to different rules and regulations than banks and other financial institutions. This leads to different interest rates as well.
- People commonly seek hard money loans for real estate projects. Real estate projects are considered to have a higher risk than many other types of investments. As a result, lenders must charge higher interest rates to compensate for the increased risk that the borrower will default on the loan.
- Hard money loans are a top option for real estate investors who are in a hurry to secure financing for their next project. The high-interest rate is the price people are willing to pay for a quick turnaround time in a time-sensitive situation.
So, is having a low-interest rate always better?
Advantages of Hard Money Loans
Some people might be tempted to take the lowest interest rate they can find. Many real estate investors choose hard money loans, even if it means paying a higher rate. People are willing to pay relatively high hard money loan interest rates for three primary reasons.
Get a Faster Loan for a Real Estate Project
Successful real estate investors know that a slow deal is a dead deal. Sometimes you need quick access to keep up with the real estate market. Banks and similar financial institutions may sometimes take months to approve loans. Private lenders can approve hard money loans within days, which gives the borrower a huge competitive advantage.
Secure Funding for a Short Loan Term
Traditional loans like 30-year mortgages are ideal for homeowners shopping for primary residences. Homeowners aren’t normally looking to resell or refinance immediately, so they’re looking for low-interest rates for their long-term loans. Real estate investors normally look for loans with shorter terms because they may borrow money for months instead of years.
Hard money loans are typically for bridge, construction, or fix-and-flip projects. The investor often plans to sell or refinance the property within a short period. Paying a high-interest rate for a short time doesn’t create as much financial hardship, so getting the money fast is more important to many investors in this situation.
Lowers Your Hard Money Loan Interest Rates Over Time
If you build a relationship with a private lender, you might be able to get lower hard money loan interest rates over time. Private lenders have more freedom to set whichever hard money loan interest rate they deem appropriate, within reason. They aren’t tied to the rates Fannie Mae and Freddie Mac set, and they can consider conditions beyond traditional measurements like your credit score.
In other words, if you work with the same hard money lender on several projects, you might be able to build trust with them. The more your private lender trusts you, the less risk they see in sending you money. After you prove it isn’t risky to loan you money, you will likely receive hard money loans with lower interest rates.
Find a Low Hard Money Loan Interest Rate
Many real estate investors find that their best option is to apply for a hard money loan with a private lender. When you work with our team at Capital Fund 1, we can help you quickly finance your next project. As we build a relationship over time, we can offer more favorable terms to our most trusted developers.
Contact us today to learn what kind of hard money loan interest rate you can expect for your next projects.