Real estate investment is dynamic, and hard money lending has become a popular option for fast and adaptable financing. However, navigating this domain can be overwhelming without a solid understanding of its terminology.
Read on to learn the essential hard money loan terms for 2024 to help you gain the necessary knowledge to invest.
Hard Money Fundamentals
Here are the key terms for hard money loans:
Appraisal
In hard money lending, an appraisal is where a professional appraiser evaluates a property’s value. This assessment considers various factors like size, condition, and location to determine the property’s fair market value. The appraisal ensures that the loan amount aligns with the property’s actual worth, facilitating smooth transactions in real estate lending.
Loan-to-Value (LTV) Ratio
Loan-to-value (LTV) is a ratio showing how much of the property’s value the lender is willing to finance. It is usually between 60% and 80%, but it can vary depending on the type of property and the borrower’s credit record.
Loan-to-Cost (LTC)
The loan-to-cost (LTC) ratio will represent the percentage of the loan amount compared to the total project cost, which includes property purchase and renovation expenses. To calculate it, divide the loan amount by the total project cost and multiply by 100%. A higher LTC ratio indicates greater leverage for the borrower and less need for additional cash or collateral.
Points and Interest Rates
When discussing the financial aspect of hard money loans, investors often come across terminology such as “interest rates” and “points.” Points, usually known as loan origination fees, are expenses lenders charge when you first apply for a loan. Each point equals 1% of the loan amount and can influence the amount you repay. However, the interest rates for hard money loans are typically between 8% and 15%, and occasionally much more.
After-Repair Value (ARV)
The after-repair value (ARV) estimates the property’s value after renovations, providing insight into its potential profitability. Hard money lenders use the ARV to assess the viability of a project and determine the loan amount they’re willing to offer. A higher ARV typically translates to a more favorable lending scenario, as it suggests a more significant potential for returns on investment.
Loan Term and Amortization
The loan term refers to how long the borrower has to repay the loan, which typically ranges from six months to three years. Unlike traditional mortgages, hard money loans may require interest-only payments throughout the term, with the principal paid off in a “balloon payment” at the end. To effectively manage repayment responsibilities, it’s essential to understand amortization, which involves gradually paying both principal and interest over time.
Prepayment Penalty
Prepayment penalties are incurred if the loan is repaid before the agreed-upon term, typically as a percentage of the remaining balance or a set number of months’ interest. These penalties can add to the overall cost of borrowing.
Understanding the language of hard money lending is important for real estate investors looking for financing opportunities in 2024 and beyond. By learning terms and using strategies to reduce risks, investors can make the most of their real estate investments while keeping risks low. If you want reliable experts to handle your loan process, GW Private Capital Inc. can help you. Contact us to learn more.
