Hard money loans (sometimes called Bridge Loans) are often considered the sole purview of borrowers with bad credit history, but there are other benefits to using hard money to finance real estate investments. There are two factors that can influence a borrower to choose hard money over conventional bank or life insurance company loans: interest rates and prepayment penalties.

Pros and Cons of Higher Interest Rates

The higher interest rates (typically 9% to 15%) that are an inherent part of hard money lending are often cited as a disadvantage, but these higher rates can be offset by numerous advantages with the right deal. In part, this higher interest rate covers the convenience and speed (and minimal red tape) with which such loans are provided. It also accounts for the risk that the private lender is taking in funding the loan. Another factor that can offset the higher interest rates is that most hard money lenders will do interest-only payments for the term of the loan as these are typically short-term loans (six months to two years). This allows you to have more cash in pocket until your project is complete and you’re ready to pay back the loan in full. While having to pay the bulk of the loan back at the end may be viewed as a con by some, this is easily accomplished when your project pans out and pays off. A project that might not have been possible without the quickness and flexibility of hard money financing.

Pros and Cons of Prepayment Penalties 

While banks offers loans at lower interest rates, they have much more red tape and regulations for borrowers to follow. These frequently include prepayment penalties. This boils down to one of the vital differences between hard money and conventional loans: short-term versus long-term. The short-term nature of hard money loans means that most private lenders are not going to charge borrowers a prepayment penalty (or if they do, it will be significantly lower), whereas a bank lender wants to ensure that what little profit they are making (due to the lower interest rate) is not circumvented, so they are likely to have higher prepayment penalties to offset such losses. Life insurance companies almost always will have very stringent and expensive prepayment penalties that last for many years.

The Bottom Line: Determining whether hard money or institutional loans are better has to happen on a project-by-project basis. Deals with smaller profit margins or that you want to hold on to for awhile will be better suited for a traditional long-term mortgage, while others that may not fit the rigid guidelines for bank or life company financing need the speed and flexibility offered by a private lender. If you have a need for a hard money loan, contact Montegra Capital Resources at 303-377-4181.