Hard money is quite different to conventional financing. Some of the differences can be quite significant. However, the one thing both hard money and conventional financing have in common are the costs associated with borrowing. Both types of financing come with a variety of charges and fees through which lenders make their money.
The thing about hard money is that its costs tend to be higher. How much higher? There is no black-and-white answer. Hard money lenders are private lenders. That means they do things differently. They have more leeway in setting their interest rates, fees, and charges.
Interest Rates
Let’s start with interest rates. They are an integral part of both hard money and conventional financing. Actium Partners, a Utah hard money firm located in Salt Lake City, says it is not unusual for hard money interest rates to be several percentage points higher than their conventional counterparts. Again, there is no clear standard here.
They charge higher rates because the loans they make are riskier. Higher rates mitigate some of the risk by protecting them against potential losses they encounter when loans go into default.
Before moving on, there is an upside to the interest rate dilemma: much shorter terms. A typical hard money loan has a term of 6-24 months. So even if a borrower paid 15% on a 2- year loan, he is still likely to pay less in total interest than he would on a 30-your conventional loan at 7%. Shorter terms keep the total amount of interest paid in check.
Other Costs of Borrowing
Interest is just one of the costs associated with hard money. There are plenty of others. As you go through the list below, you might recognize some of the terms. They are the same terms utilized by conventional lenders.
- Origination Fees – Origination fees cover the costs of arranging and writing loans. They are sometimes referred to as points. They can be anywhere from 1-5% of the loan amount.
- Underwriting Fees – Lenders charge underwriting fees to cover the costs of processing loan applications and handling documentation. The more documentation involved, the higher the fees tend to be. They can be charged at a flat rate or is a percentage of the loan amount.
- Valuation Fees – Hard money approvals are based on collateral value. Collateral must be appraised, and the cost of doing so is passed on to the borrower as a valuation fee.
- Legal Fees – Some hard money lenders pass on their legal fees to borrowers. These fees cover the cost of legal services throughout the transaction.
- Servicing Fees – Servicing fees are charged to cover the costs of servicing loans and processing monthly payments. They tend to be pretty inexpensive. However, they can still add up over the life of alone.
In addition to all these fees, some hard money lenders apply a fee to early repayment. Also known as a prepayment penalty, it is designed to make up for some of the interest lost when a borrower repays early.
Don’t Forget Property Insurance
In closing, hard money lenders have a habit of insisting that borrowers take out adequate insurance to protect the property until a hard money loan is fully repaid. The property acts as collateral on the loan, and lenders want that collateral protected.
Although there are plenty of differences between hard money and conventional financing, both involve a variety of costs. It boils down to the fact that lending is a service. Borrowers pay for that service whether they are getting hard money or a conventional loan.
