There are few things more frustrating than being inches away from your renovation or repair goals, only to find yourself a few hundred or thousand dollars away from completion.
If you can’t get cash from friends and family, it’s easy to get lost among all the different types of lending. Check out the pros and cons of taking out a hard loan to see if it could work for you.
Benefits of a Hard Money Loan
Hard money loans have a lot in common with mortgages but come from independent companies, not big banks. They’re designed for property renovations and repairs, often for investment purposes. If that’s your aim, view these pros of hard money.
You Enjoy Some Flexibility
One advantage of working with hard money lenders instead of FDIC-insured banks is flexibility. You can negotiate the amount you borrow, or take out a hard money line of credit where you only pay for how much you use.
Income and Credit Don’t Matter as Much
In contrast to a typical loan, lenders don’t focus on income and credit score when deciding whether or not to lend you hard money. They judge the condition of your property and the plans you have for it, instead.
The Amount You Need Is What You Get
Because hard money is tied to the post-renovation worth of your property, you’re sure to get what you need. If you overshoot the loan amount, it’s a good sign that you’re putting more money than you should into your investment.
Hard Loan Downsides
As with any method of borrowing money, there are some serious cons to consider when looking at hard loans. Hard money is meant for a specific purpose and is a risky path if you don’t know what you’re doing.
Interest Rates Are Very Steep
Hard money lenders don’t have federal insurance to protect them when things go wrong. In light of all the potential trouble of house-flipping and other renovation projects, many lenders charge upwards of 25% for a down payment. Interest rates are often in the double-digits as well.
You Have a Limited Timeline
Typical loans let you pay over tens of years, while hard loans are shorter-term. Your property’s value could change or you could start a neverending renovation that risks the lender’s money. To prevent this, hard loans tend to be a few years long at most.
Lenders Have More Protection Than You Do
High interest rates, limited timelines, and the property insurance you pay for all form a cushion for your lender. You, on the other hand, don’t have much protection as a borrower.
Hard money lenders don’t have federal backing. If the lender goes under or runs away with your money, it may be hard to get compensation. Lenders also sometimes approve borrowers who can’t pay the loan back.
It’s up to you to research laws governing hard money lending and to know your means.
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Knowing these pros and cons, you can make an informed decision about whether a hard loan is the best fix for your next financial dilemma.
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