A Private Money Loan is a short term real estate loan is often times used to purchase and renovate properties. A Private Money Lender provides the capital the investor needs to purchase the property, complete high ROI renovations, and thereby increase the after repair value of the home.
Crucially, the real estate investor is required to pay back the full loan amount at the end of the loan terms (usually 12-24 months). Usually, the funds from the sale of the house are used to pay back the full loan amount.
In most cases, Private Money Lenders will provide up to 70% of the funds needed to acquire the property, meaning that the borrower is responsible for covering the shortfall.
For Private Money Loan to work successfully, the after repair value of the property must be substantially more than the original purchase price.
Reputable Private Money Lenders like TPC Lending offer interest-only repayment terms. For example, if you were offered a $200,000 hard money loan, with a 10% interest rate, your monthly payment would work out to $1666.66. Here’s how it works:
In other words, your monthly payment only covers the interest portion of the capital that was borrowed. However, you are required to pay back all the capital that was borrowed when the hard money loan expires.
It helps to think of it as a balloon payment, but instead of paying a portion of the capital back, your balloon payment covers 100% of the amount borrowed.
only cover the interest portion of the . This means that with each , you don’t make a dent in the total capital that was borrowed. Instead, the expectation is that you will pay back 100% of the capital, when the Private Money Loan terms come to an end.
For example, let’s imagine you applied for Private Money to the value of $150,000, with an of 10% and a of 6 months. In this case you would pay:
As you can see from the Private Money Loan example above, you only pay off the interest portion of the each month. You repay the full capital amount when the expires.
Apart from a , this is one of the main ways in which Private Money Loans differ from . With a , the is a mixture of the interest owed and the outstanding capital amount. This is what allows the to pay off their entire mortgage over time. The basically chips away at the capital month after month and year after year. When the comes to an end, there is no more capital to pay off.
This traditional approach doesn’t work for house flippers, because of the cash flow challenges that it would introduce. Conversely Private Money Lending provides a solution for property investors that need to successfully execute a .
typically range from 12% to 18%, depending on the Private Money L that you choose, the , value of the property, and the amount of house flipping experience that the investor has.
In most cases, these three attributes will have a massive impact on the final rate that is offered to you. Generally speaking, the better your credit history and the more experience you have, the lower the hard money rate will be.
In most cases, the house borrower is required to put down between 20% and 30% of the project cost in order to initiate a hard money loan. For example, if the Private Money Lender covers 70% of the project cost, the investor would need to cover the shortfall of 30%.
On average, real estate investors need a 650 credit score. Compare that to the average 680 – 750 credit score traditional lenders require and it’s easy to see why hard money loans are a great option.
If you plan to keep the home and rent it out, you may find credit score requirements to be a little higher – usually around 660 only because the risk is higher.
On a broad level, Private Money Loans and Bridge Loans are very similar. However, Bridge Loans can be offered by traditional finance institutions, and they can be used to fund a wider range of purchases (rather than just real estate).
While the interest rates on traditional loans are typically lower than Private Money Loans, the approval process is far more stringent and time-consuming. This can be a dealbreaker when you spot an opportunity for a fix and flip. In most cases, you need to move swiftly in order to capture the deal. That is why a Private Money Lender like TPC Lending can be so useful to investors. Effectively you get:
The origination fee is an additional cost associated with Private Money Loans. It usually ranges from 4-8% of the loan, but this is ultimately up to the lender that you choose. It is the expense that the lender charges the borrower to cover all the costs associated with initializing the loan.
So, if your loan amount is $200,000 and the origination fee is 6%, that would result in a cost of $12,000. This cost is built-in as a percentage in our Private Money Loan.
