How To Refinance A Hard Money Loan
The commercial real estate industry in the United States has been steadily expanding since 2010. A total of 91 billion U.S. dollars worth of commercial real estate was built in the country last year alone. This growth is driven by several factors, including affordable interest rates, strong business demand, and increased investment from foreign buyers. As a result, the commercial real estate market is expected to expand in the coming years providing a significant boost to the economy.
If you are a real estate investor, hard money loans are your best friend. Without them, building wealth would be a real challenge. But what if one time your hard money loan must be replaced with a longer-term solution, or you just need more cash for your next investment project? The answer is refinancing! Let’s go through the main tips on how to refinance a hard money loan!
What is a hard money loan?
Hard money loans are secured loans that are used to finance hard assets—usually real estate. The lender looks at the investment itself and uses that as collateral, rather than relying on the borrower’s creditworthiness. This can be a great option for people who might not otherwise qualify for a loan. So if you’re looking to buy an investment property and traditional lenders have turned you down, give hard money a try.
When considering a loan, hard money lenders always assess the LTV, or loan to value. This is done to protect their investment, as the primary basis for making a hard money loan is the liquidation value of the collateral backing the note. The value of the property can be determined through a BPO (broker price opinion) or an independent appraisal.
Hard money rates & fees
When you take out a mortgage from a bank or other traditional lender, you typically make monthly payments that include both interest and principal. The principal is the amount of money you borrowed, while the interest is the fee charged for borrowing that money. Over time, as you make these monthly payments, the amount of your payment that goes toward the principal gradually increases, until you eventually pay off the entire loan. With a hard money loan, however, you only pay interest every month. But you will still owe the full amount of the loan at the end of its life cycle.
Current hard money loan rates vary between about 7.5% and 15%. However, rates and fees may vary depending on hard money lenders. For this reason, it’s important to shop around and compare multiple lenders before choosing one. With careful research, you can find the hard money lender that offers the best terms for your needs.
To calculate the total interest paid on a hard money loan, you just need to multiply the monthly repayment amount by the number of months that you hold the property.
Say your repayment is $1500, and you hold the property for 12 months, the total interest amount would be $18,000.
Of course, this is just a basic calculation – other factors can affect the total amount you’ll pay, such as:
- Origination fee (this type of fee is charged as points – usually from 2 to 4, where 1 point = 1% of the total loan value)
- Processing fees (it includes fees for documentation and processing, usually $900 or so)
- Appraisal fee (sometimes this fee is not required)
We hope it’s a good starting point to get an idea of what you’re getting into.
Hard Money Loan Refinance Tips
Can you refinance a hard money loan? Definitely! There are just a few things you should be aware of.
First, you’ll need to get your current lender’s permission. Otherwise, you may be facing a stiff prepayment penalty.
Secondly, make sure you compare apples to apples when shopping around for a new loan. A lower interest rate may seem like a great deal, but if it comes with a higher origination fee, you could end up paying more in the long run.
Finally, remember that hard money loans are typically for shorter terms than traditional mortgages, so you’ll need to be sure you can afford the higher monthly payments.
If you take the time to plan and do your homework, you can avoid these common pitfalls and save yourself a lot of headaches down the road.
How to qualify for refinancing
Doing a cash-out refinance means that you take out a new loan larger than your existing mortgage. This allows you to pocket the difference between the two loans, giving you a lump sum of cash that can be used for any purpose. So if you need money for a major purchase or unexpected expense, a cash-out refinance may be the best way to get it. So, how to qualify for refinancing?
1. Financial requirements
Choosing to refinance your hard money loan with a bank or other traditional lender can be a tedious process. You will need to collect mountains of documentation, including your current income, job history, credit score and history, and more. In contrast, a hard money lender only needs to know your updated plan, progress, and exit strategy. These types of lenders are interested in building a relationship with borrowers and investors, not in burying them under a mound of paperwork. As a result, refinancing with a hard money lender is often a quicker and easier process.
2. Property requirements
To qualify for hard money refinancing, your property itself must be rental-ready. It shouldn’t be under construction, and not only that. Some lenders only let you refinance seasoned properties. So even if your property is rental-ready, you still may need to wait six months or more.
How to refinance hard money loans
At Lending Bee, we understand that refinancing can be a tricky process. There are a lot of things to consider, and it can be hard to keep track of everything. That’s why we’re here to help. We are made up of a team of experienced hard money lending experts, and each of our loan officers is trained to structure mortgages for custom scenarios. As a result, we can provide you with the best service and make sure you get the best refinancing deal.
If you’re looking to refinance your hard money loan for a longer-term period, you can consider two main options: conventional bank loans and long-term rental loans. Both have their pros and cons, so it’s important to weigh your options carefully before making a decision.
Conventional bank loans
Refinancing a hard money loan with a conventional loan usually requires meeting all the typical requirements set by the lender. However, these can vary depending on your unique financial situation. Conventional bank loans tend to have lower interest rates, but they also require a higher credit score. The requirements are the following:
- Credit score: 620 +
- Equity: 20% +
- Insurance: required
- Seasoning for cash-out refinancing: from 6 months
Banks are like the old saying goes, “the higher the risk, the higher the reward.” But when it comes to refinancing a hard money loan with a traditional mortgage, they tend to shy away from risk. If your investment property doesn’t pass their high standards, you’ll need to refinance elsewhere. Fortunately, there are plenty of options for those willing to take on a little more risk. So if you’re looking to refinance your hard money loan, contact Lending Bee!
Long-term rental loans tend to be more expensive, but they’re more flexible than conventional ones. Rental loans are designed for a specific purpose: to help real estate investors finance their rental properties. And, in theory, they do a pretty good job of it. Here are some of its requirements:
- Credit score: 660+
- LTV: up to 80%
- DTI 1.10 minimum
- Seasoning for cash-out refinancing: from 6 months
Rental loans attempt to solve all the problems associated with conventional and government-backed loans, making financing a rental property easier and more affordable.
When it comes to creating a passive income stream, real estate is one of the most tried-and-true options out there. And, with the right strategy, it can be an incredibly powerful tool for building wealth. One popular option is to refinance out of hard money loans. This can give you the money you need to buy additional rental properties and grow your business portfolio. And, as your portfolio expands, so will your income.
So, if you’re an entrepreneur looking for a way to build long-term wealth, real estate investing is worth considering. Just be sure to create a solid strategy and contact Lending Bee for the best financing solution.