What is a Hard Money Loan?

 Private loan money is most often called hard money, and usually the loan arises from a source that specializes in structuring such loans. More frequently than not really a hard money loan will contain an initial mortgage on a house thus creating hard money residential loans. There are numerous identifying factors involved with private loan money which is called a tough money loan.

As an example, as previously mentioned it can be quite a first mortgage. Since the borrower's credit doesn't matter around the amount of equity in the property, an initial will in effect prevent a possible lack of the entire property if, as an example, another loan is "ahead" of the hard money loan. The key reason why the borrower's credit doesn't matter much for private loan money is that the lender looks to the property for the security, and the lender can be being paid dearly for the opportunity that the lender is taking by basing all the money on the property value alone.

You see, another facet of a tough moneylender is the fact that they generally charge very good interest rates along with high points. Sometimes, if the property is secure enough, those high points will soon be rolled into the particular loan.hard money calculator Usually the loan isn't paid in the typical Principle + Interest (PI) but most likely is interest only with a balloon at the conclusion of the stated loan period. In this manner, in effect, the borrower is paying interest on interest, since points are interest, and because the mortgage may have been calculated including the points, then every payment the borrower makes, paying interest only, is actually interest on interest.

Generally, most hard moneylenders want a cautious appraisal of the property. This is again used within the protection that the private loan money lender desires. The lender will go through the Loan to Value Ratio (LTV), that will be the percentage amount that the loan will soon be against the current value of the property. As an example a 70/30 LTV on home appraised at $100,000 ensures that the lender would lend $70,000 against that property.

Taking this example further, let's assume that the hard money residential loan on the property is $70,000 and the offer will bring the lender 5 points at a 12% interest rate, payable interest only. The loan is due and payable in its entirety in 2 years.

5 points is corresponding to $3,500. ($70,000 X.05), and at 12% annually, the lender would receive payments of ($70,000 X.12 = $8,400 per year divided by 12 months= $700 per month) $700 monthly for 2 years. Remember that points are collected at closing when the loan is actually made. Thus in interest only the lender will make $3,500 + $8,400 + $8,400 = $29,300 in just two years. Perhaps you will see why individuals liked to create hard money residential loans!

However, with property values falling so quickly many hard money lenders took a serious beating. With a lack of approximately 40% of the worth originally appraised for, the lender now must undergo foreclosure, which will cost the lender at least $8,000, plus eviction proceedings costing about $1,000, and they still must bear the expense of repairs on the home that the evicted owner could have completely trashed, along with any unpaid taxes.