Commercial banks typically provide loans at the prime interest rate, which is what their ideal and most creditworthy borrowers pay. Private real estate loans come with interest rates higher than conventional mortgages, but they can be a smart choice for a short-term financing tool. It’s worth noting that they’re the hard money lenders California real estate investors often turn to when they need to obtain quick cash to close a deal.
You may see mortgage loans advertised with annual interest rates of less than 3% during 2021. With minor credit issues, however, a bank may offer a mortgage, but with interest higher than the advertised prime rate. It may also decide to reject your loan application.
How Private Lenders Determine Interest Rates
Choosing private lenders for real estate purchases has helped property investors reach their goals when a less than stellar credit history was an issue for traditional banks. A hard money loan interest rate may appear high when compared to a commercial bank but the rates generally remain the same for all borrowers.
Unlike a bank, a private lender does not place you in a “subprime” category; your venture is instead viewed as an investment. A private hard money lender is significantly less inclined to view a real estate loan as “too risky” when the principal amount is based on a property’s current value; a lender may fund up to 75% of its worth.
If you need to refurbish a property, it could cause the loan-to-value ratio to decrease based on the cost of repairs. In this case, the amount of capital you need for improvements may be subtracted from the property’s current market value. A lender’s risk increases when loan-to-value ratios decrease, but a higher interest rate can make up the difference.
When To Include Loan Rates in Your Financial Forecast
The benefits of liquid cash while searching for real estate can easily outweigh an increased interest expense. Cash reserves enable you to move quicker than the competition when you’re scouting for a potentially lucrative investment property. With the certainty that comes with liquidity, you have a better chance of finding an ideal property and placing an offer quickly.
With a cost-benefit analysis, you’ll get a good idea of the funding you’ll need for repairs or improvements. Through careful budgeting, you could time when your property begins generating revenue. If its income stream comes through as planned, it should comfortably cover your loan payments at the interest rate charged by a hard money lender.
Short-Term Repayment Schedules and Interest Rates
Whether you’re looking to improve a distressed property or settle an estate, a private lender understands your circumstances are temporary; the future can change drastically. Hard money and estate loans are typically paid back in as little as six months, but a repayment schedule can last for five years. One of the reasons why conventional mortgages come with lower interest rates is because a 15- or 30-year note can be sold if a borrower defaults.
It’s often assumed that the Federal Reserve sets the prime lending rate, but each financial institution determines its rates based on internal criteria. You may, however, avoid a bank’s lengthy application process and possible rejection by working with a private lender with the capital to meet your objectives.