What is a Good Hard Money Loan Rate?

Interest rates on hard money loans typically range from 8% to 15% APR. Compared to traditional mortgage rates, which hover around 6% to 7%, these rates are much higher, but for good reason. Hard money loans offer much greater speed and flexibility than other mortgage types.

A “good” hard money loan interest rate can range dramatically from place to place. Rates vary based on project risk, property type, local market conditions, and other factors. An excellent rate in one city may be just average in another.

In addition to interest rate, it’s important to consider other fees, like loan origination fees, prepayment penalties, and more to understand the true cost of a loan. A loan with a seemingly low interest rate may be offset by other high fees.

Understanding Hard Money Loans

Hard money loans are short-term, asset-based financing solutions secured by real estate, a “hard” asset, rather than the borrower’s income, finances, or credit score. They’re fast, flexible, and a great option for real estate investors who need quick funding and fewer underwriting hurdles.

Definition and Key Characteristics

Hard money loans rely primarily on the value of the collateral property, rather than the borrower’s credit profile. They’re an accessible funding solution for those who are turned away from traditional banks.

Asset-Based Lending vs. Traditional Financing

Differences between hard money loans and traditional mortgages include:

Funding timeline: Hard money loans can take just 7-10 business days from application to funding, whereas traditional mortgages can take months.

Loan terms: While traditional mortgage terms range from 15 to 30 years, hard money loan terms range from 12 to 24 months.

Interest rates: Hard money loan rates tend to be higher than traditional loan interest rates because of the greater risk associated with these loans.

Documentation requirements: Because hard money loans hinge solely upon the collateral property value, they require significantly less documentation than traditional mortgages.
Flexibility: Hard money loans have much greater flexibility in terms of draw schedules, exit strategies, and negotiation of terms.

Overall, hard money loans are a trade-off. Borrowers get quicker access to cash and easier loan approval, but are subject to higher borrowing costs and shorter repayment periods.

Typical Use Cases: Fix-and-Flip, Bridge Loans, Development

Hard money loans have a range of different use cases. These loans can be used for projects like:

Fix-and-flips: These loans can help investors purchase, renovate, and sell rundown properties. Hard money loans may be used to cover the cost of the purchase and the renovation.

Bridge loans: This loan type is used to fill the financial gap between buying a new property and selling an existing one. They enable investors to act on new investments before permanent financing kicks in.

Factors That Influence Hard Money Loan Rates

No two hard money loans are alike. Each deal’s specifics, from property to borrower to market, drive the hard money loan interest rate and fee structure. Read on to learn the factors that influence a loan’s interest rate.

Loan-to-Value Ratio (LTV)

The loan-to-value ratio (LTV) plays a significant role in each hard money loan. This is a ratio of the loan amount to the collateral property’s total value. LTV is a main determinant of risk for the lender. A low LTV allows a greater cushion for the lender if the borrower defaults. That means, the lower the loan’s LTV, the lower the interest rate.

Property Type, Condition, and Appraisal Value

A property’s specifics, like property type, condition, and value, also have a strong influence on hard money loan rates. Single family homes in good condition may qualify for lower rates than vacant lots or heavily distressed commercial buildings. Factors like environmental reports or structural inspections can also drive interest rates.

Borrower Profile: Credit Underwriting & Track Record

Hard money loans don’t rely on credit scores, financial history, or experience for approval. That said, strong credit and a history of real estate success may still have an influence on hard money loan rates. Repeat borrowers and flippers with proven profit histories help obtain a lower rate.

Market Demand, Risk Perception & Short-Term Financing

Local markets can also influence hard money loan rates. A hot real estate market with plenty of hard money lender competition can push rates downward, while economic uncertainty can drive hard money loan rates up.

Lenders also price in project risk. That means niche strategies, like a historic renovation, may come with premium pricing.

Loan Term, Structure, Points & Fees

To offset hard money loan interest costs, some borrowers pay fees known as “points” upfront. Each point is equal to 1% of the loan amount. That means a borrower who pays two points upfront shaves 2% off their interest rate.

Another way to modify the cost of a hard money loan is with interest-only payment structures. This allows borrowers to pay only the interest on the loan throughout its duration, with a lump sum payment at maturity.

Remember, interest rates are not the only fees associated with your loan. It’s important to look at origination fees, underwriting fees, and closing costs to understand the full cost of your loan, beyond just headline rates.

Typical Hard Money Loan Rates by Investment Strategy

The interest rate on your hard money loan can vary based on how you plan to use it. While they can vary greatly based on region and lender, read on to learn some starting points for different loan types.

Fix-and-Flip Residential Projects

Average rates for hard money loan fix and flip projects generally land between 10% and 12% APR plus 2 to 3 points, depending on loan LTV. A quicker exit of 12 months can help borrowers secure rates on the lower end of the spectrum.

Commercial & Mixed-Use Property Financing

Commercial and mixed use properties typically have greater complexity, and their rates reflect that. APR on these loans generally sits between 11% to 14% APR plus 3-4 points. To hit the lower end of that spectrum, borrow from Source Capital. Our interest rates for first-position loans cap at 11.99%.

Bridge Loans & Inter-Property Financing

Bridge financing hard money loan rates often start around 9 to 11 percent APR with 1 to 2 points for shorter loans. These provide fast funding to investors competing in tight markets.

How to Secure Competitive Hard Money Loan Rates

Proper planning leads to the best possible outcome. Plan out your loan goals and exit strategy first, then shop for lenders.

Assess Your Financing Needs & Exit Strategy

First, take time to plan out your timeline for purchase, renovation, sale, or refinancing. Be sure to be as precise as possible. This can help your lenders have greater confidence in your exit plan.

When planning, add contingency buffers like extra months for delays and budget cushions for unexpected costs. Not only can these help you prepare correctly, but they may reassure your lenders and lower your hard money loan rates.

Prepare Documentation: Origination Fees & Points Transparency

Next, it’s time to prepare your documentation. Assemble past project P&Ls, contractor bids, and appraisal orders to streamline the underwriting process and reduce hidden fees. It can also help to list all fees upfront, including origination, underwriting, closing, and factor them into your APR comparison.

Compare Term Sheets: Rates, Prepayment Penalties & Fees

Now, it’s time to compare. Lay out side-by-side comparisons of rate, points, interest reserve requirements, and any yield maintenance or defeasance clauses. Highlight lenders that offer flexible prepayment without punitive penalties to preserve profit on early exits. Source Capital, for example, never charges prepayment penalties.

Structure an Interest Reserve Account

An interest reserve account is another great signal to lenders that you’re responsible and trustworthy. Set aside funds upfront for your interest payments. This shows potential lenders that you have strong project planning skills and reduce their risk on your loan, and can help smooth your cash flow down the line.

Tactics to Negotiate and Lower Your Rate

In many cases, the initial offer from a hard money lender is a starting point. Read on to learn levers you can use to negotiate better loan terms and a lower hard money loan rate.

Build a Track Record with Repeat Business

A history of successful flips with consistent, on-time payoffs demonstrates your trustworthiness and lowers your risk. Some lenders also offer loyalty programs or relationship pricing tiers after two or three consecutive loans. This can unlock discounts that may otherwise not be available.

Bundle Multiple Projects with One Lender

Another way to lower your rate is by packaging loans together. Taking out two or three loans in a single package may earn you volume discounts on the blended rate of the individual loans. Tasks like these can alleviate the administrative burden on your lender and translate into cost savings for you.

Demonstrate a Clear Exit Strategy

It’s important to have at least one concrete exit strategy, whether that’s a sale, refinance, or otherwise. Provide as much evidence as possible, including market comps that support your assumptions in terms of timeline. This can lower your perceived risk and may result in a lower rate.

Common Pitfalls in Hard Money Financing

Avoid these common mistakes when it comes to your hard money loan.

Overlooking Points, Origination Fees & Hidden Costs

Don’t focus solely on your hard money loan interest rate and principal. The true cost of your loan includes all upfront charges, like underwriting fees, appraisal fees, origination fees, and legal expenses. A lender may offer you a low interest rate, but these combined fees can quickly offset it.

Ignoring Prepayment Penalty Clauses

It’s also a good idea to check your lender’s guidelines around prepayment. A prepayment penalty, whether a percentage or a fixed fee, can dramatically increase the cost of your loan. Look for lenders who don’t charge pre-payment penalties, like Source Capital, for the most flexibility.

Accepting Excessively High LTV Loans

Some lenders may offer excessively high LTVs, like 75% or higher, but these are typically a bad idea. Once your LTV passes a certain threshold, you may experience rate hikes, need mandatory mortgage insurance, or be forced to demonstrate interest reserves. Instead, keep your LTV realistic, like under 65%.

Failing to Verify Lender Credentials

Lenders aren’t all created equally. It’s important to do your due diligence and thoroughly research your lender before signing a loan with them. Check licensing, track record, and reviews from past borrowers. Doing so can help you avoid predatory lenders with shady practices.

Underestimating Carrying Costs & Timeline Risks

Factor extra expenses, delays, and market downturns into your exit strategy. These factors can all prolong your loan timeline. Without factoring them in, you run the risk of defaulting on your loan. It’s a good idea to account for a 10% to 20% overflow budget and timeline buffer just in case.

Frequently Asked Questions

What Is the Average APR on Hard Money Loans?

Hard money loans have an average APR ranging from 8% to 15%.

How Are Hard Money Loan Rates Calculated?

Hard money loan rates are calculated based on the risk associated with your loan. Factors like LTV, project type, borrower experience, and more can influence the interest rate on your loan.

Can I Negotiate My Hard Money Interest Rate?

Yes, you can typically negotiate terms on your hard money loan. Other ways to do so include building a track record with your lender, bundling multiple loans together, or creating a stronger exit plan.

Are Hard Money Interest Payments Tax-Deductible?

As long as your hard money loan is being used for business purposes, the interest paid on your loan can be deducted as a business expense.

What Credit Score Do I Need for a Hard Money Loan?

There is no minimum credit score requirement for hard money loans from Source Capital. These loans are secured based on assets, rather than finances. Those with poor credit or a history of bankruptcy are encouraged to apply.

How Do Hard Money Rates Compare to Traditional Bank Loans?

Hard money rates tend to be much higher than interest rates on traditional bank loans. This is largely due to the greater risk associated with this loan type.

Conclusion: Achieving Favorable Hard Money Loan Rates

For the lowest hard money loan rate possible, it’s important to borrow a conservative LTV and develop a strong exit strategy. Real estate investors who regularly take out hard money loans may also benefit from lender loyalty programs.

While hard money loans carry higher interest rates, strong planning and negotiation can help bring costs closer to those of traditional mortgages.

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