Hard Money Interest Rates Explained
Let’s say you’re getting a hard money loan and the lender quotes you an interest rate between 12 to 14 percent. Whoah! That sounds insane doesn’t it? That sounds insanely high when right now the average interest rate from a bank is 4 to 6 percent. We’re talking 12 to 14 percent folks. That’s double digit interest rates, right?
Now let me explain to you how hard many interest rates actually work. Most of the loans that you’re getting from a hard money lender are going to be very short term in nature. Somewhere between 1 to 12 months.
So let’s say you only have that loan for 4 months. You’re buying a property, you’re fixing it up, and some at some point in the future, 4-6 months down the road, you’re going to resell that property.
So let’s say you have this hard money loan for 4 months and the interest rate is 12 percent. How do you figure that out? That’s 4 percent not 12 percent, 4 percent. So how do you figure that out?
You take 12 percent. That’s your annualized interest rate and you divide it by 12 months, that’s going to give you 1 percent a month.
If you hold the loan for 4 months, that’s 1 percent a month, so that’s 4 percent, not 12 percent.
Hard money interest rates aren’t as high as they seem to be. Sophisticated real estate investors know how to use hard money lenders to make more money. To make more money in their investments by getting these loans paid off in 4 to 6 months. To walk away with an interest rate that’s actually 4 to 6 percent. That’s on par with what banks are charging.
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