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What Are the True Costs of Hard Money Loans?

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If you are considering obtaining financing from a private lender for the first time, you might be wondering about the costs of hard money loans. The costs of hard money loans are significantly higher than bank loans because they are funded by private investors.

Here is a helpful hard money loan calculator to help you figure out all the costs.

Costs of hard money lending are:

  1. Interest rate
  2. Upfront points (1 point = 1% of the loan amount)

Interest Rate

Interest rates on hard money loans are always higher.  Hard money loans represent a higher risk than the traditional lending institutions are willing to accept.  In exchange for acceptance of this risk, hard money investors require a higher rate of return.  The higher the risk, the higher the rate.

In general, expect hard money loan interest rates to start at 7%, most commonly 10%.

Upfront Points

Upfront points are usually 3 points higher for hard money loans than a bank would offer.  Some loans can have as high as 10 points upfront, depending on the risk.

These points are paid to enhance the yield to the hard money investors. Also, pay for the hard money lending group’s investment in time and resources to package the loan.

The points will vary based on the loan amount.  For example, there may be a 10 point charge on a small $50,000 private money loan, but a 3 point charge on a $500,000 loan. The interest rate can be higher for unusually high risk.

In the End

One way to look at the costs of hard money loans is to calculate how much it will cost you to not have the loan.

For example:

  • If you buy residential rehab real estate fixers and remodel them and you only have enough funds to buy and fix two homes every six months and earn $20,000 profit per home, your profit potential is maxed out at four deals a year, or $80,000 per year.
  • If you were able to get a reasonable hard money rehab loan on each of those properties which gave you leverage to buy eight deals a year instead of four, your profit would double to $160,000.
  • In simplistic terms, your costs of hard money lending in this case of not getting the loan is $80,000 provided all goes as planned.

Use our hard money lenders directory to find lenders for your specific type of real estate project.

Ross Hamilton

Ross Hamilton

Ross Hamilton started investing in real estate in 2001 at 19 years of age and in his early 20’s, using the profits earned from his real estate investing business, Ross founded ConnectedInvestors.com. In 2015, Ross and his team consolidated the hard and private money lending space when they opened the doors to CiX.com. CiX facilitates over $3B in fix and flip and buy and hold funding requests each month. Ross was nominated by Entrepreneur magazine as Emerging Entrepreneur of 2011, serves on the Forbes Real Estate Council and is a professionally published author.

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