How Interest Rates for Hard Money Loans Are Determined

Hard money loans are getting popular among real estate investors in Houston. They offer a convenient financial solution for them to go ahead with their real estate investments. As you go for an investment loan, it is important to have a clear idea of how the interest rates for hard money are determined. Let’s explore the most prominent factors that create an impact on the interest rate of a hard money loan.

Loan-to-Value Ratio (LTV)

The most important factor is the loan-to-value ratio (LTV). This is a measure of how much the hard money lender is loaning (lending) relative to the appraised value of the property that will be used as collateral. The higher the LTV, the higher the risk for the lender – and therefore, the higher the interest rate charged on the loan. A typical LTV for a hard money loan range from 60% to 75%. The lower the LTV, the more equity the borrower has in the property, and the lower the interest rate.

Borrower's Credit Score

While hard money lenders focus more on the collateral property than the borrower’s credit score, a borrower with a higher credit score is seen as lower risk and is likely to get a lower rate. Many hard money lenders require a credit score of 600 or higher for eligibility. The higher the credit score above that threshold, the more it helps lower the hard money interest rate.

Rehab Costs

For rehab or fix-and-flip projects that require construction financing, hard money lenders also scrutinize the borrower’s projected rehab budget. Realistic costs and timelines lower the lender’s risk. Unreasonable projections can increase rates. Lenders want confirmation that the market can support a profitable sale that covers their loan and costs.

Competition and Market Rates

Tied to the above factors is competition among hard money lenders. When the economy is strong, rates tend to decline due to lenders competing for quality borrowers. In a weak economy or housing downturn, rates increase. But even within the same market, no two hard money loans are alike, so lenders must price based on the loan specifics. Checking published rate sheets is merely a starting point. There is room for negotiation.

Investor Vs Owner-Occupied

Investment or commercial purpose loans for house flipping, renovations, or construction projects incur higher interest rates than owner-occupied residential loans. There are simply higher risks involved when the borrower’s repayment depends on the success of the project rather than a wage income. The potential profit margins justify the higher rate for investors.

Loan Duration

Typical hard money loan terms are from 1 to 3 years. Shorter term loans generally have lower rates since the lender’s capital is not tied up as long. Loans above 12 months incur higher rates. Terms from 1 to 5 years may be possible depending on the project.

Prepayment Penalties

Borrowers often want the option to pay off a hard money loan early if, for example, they complete a rehab faster than expected or sell faster for more profit than anticipated. But early payoffs mean lenders earn less interest income. To deter this and offset the risk, lenders may impose prepayment penalties – essentially an extra interest fee. Locking in a loan without penalties can increase rates.

Get The Best Interest Rates For Hard Money Loans With FlipCo Financial

Now you know how interest rates for hard money loans are determined; you can contact us at FlipCo Financial for your hard money loan. We provide fast funds, and you can get it within 48 hours from a clear title. We will also make the process easy for you. Contact us today to apply for your loan.