I just got off the phone with a borrower who owns several free and clear rental houses and he had some great questions about hard money loans. Usually borrowers just call and ask…
What is your interest rate?
How much are the points?
It would seem you could determine the cost of the loan from just these two questions, but you really need to dig a little deeper to calculate the true cost of a hard equity loan.
Here is another more important question you need to ask even before the other two.
What’s the term or length of the loan?
A lot of hard money loans are made for just a year or two. Even if you plan to sell or qualify for bank financing within the short-term. What happens if things don’t work out that way? What if you find a really good tenant who will stay for a long-term? You may change your mind about selling. You may need to get another short-term equity loan. What will the cost of two hard money loans be in a three to four-year period?
Planning for the worst and getting a longer term loan even if that longer term equity loan is a little more expensive may be a lot cheaper in the long run.
Some hard money lenders offer balloons for three , five, and even seven years. A few even offer fully amortizing loans for up to twenty years.