Should you Consider Hard Money Finance?
Hard money finance can be a means to an end for some people and it can be beneficial. But, it really should be thought of as a last resort and not something to bank on for a long term solution. There are a few advantages to hard money finance but there are a ton of risks. Before discussing the pros and cons of hard money finance, let’s first define what, exactly, it is. Hard money finance is a loan that uses your real estate as collateral and is generally given to those who are in a position to be unable to get a traditional loan. Usually these loans are offered by private companies not banks.
So, you can’t get a traditional loan but you can get hard money finance. What’s the problem? Sounds good, right? Here’s where we discuss the cons:
First, hard money finance loans are usually secured with your real estate which means your home or property. This in itself is risky but not more so than a traditional mortgage which basically does the same thing. But, the loan itself is usually set at a much lower loan to value ratio than a mortgage. For example, say you have a home worth $100,000.00. The maximum amount you would likely get from hard money finance is $70,000.00 or 70% of the value. Often the ratio is even lower than that.
Next, the interest rates on hard money finance are exorbitant. Where a mortgage may have varying rates depending on your credit score, hard money finance starts high regardless of how pristine your credit is. While an estimate for hard money finance interest rates can not be accurately made because it varies greatly depending on the real estate market, most will start no less than fifteen percent. That’s a pretty high interest rate to get into!
So, you know what your risks are: you will likely have a huge payment, high interest rates and a low LTV rate. Are there any advantages to hard money finance? Yes. Is there ever a time you should use hard money finance? Sure.
Hard money finance is easier to get into. Credit is not usually an issue. You get your money faster also so you can spend it on what you need to. So, there are certain situations where hard money finance makes sense. In the case of getting into a fixer upper property or in bailing yourself out of a possible foreclosure, hard money finance can be just the ticket. But, hard money finance is beneficial if only used as a short term solution.
For example, say you are about to have your house foreclosed on because you lost your job. You can get hard money finance and save your home. If you gain employment and are able to refinance in a traditional manner, while you may have paid extra for the creative interim financing, you still have your home and the bulk of your investment. Or, if you have a fixer upper home a traditional mortgage company will not touch, you can get hard money finance if you believe you can flip the house or rent it and turn a profit quickly to pay off the loan.
