A hard money loan and a conventional mortgage are two types of loans that serve different purposes and have different characteristics.
A hard money loan is a type of loan that is typically used for short-term financing needs, such as real estate investments or construction projects. These loans are usually provided by private investors or companies, rather than traditional banks or lenders, and are secured by the value of the property being purchased. Hard money loans typically have shorter repayment terms, higher interest rates, and lower loan-to-value ratios than conventional mortgages.
In contrast, a conventional mortgage is a long-term loan that is typically used to purchase a home or other real estate property. These loans are provided by traditional banks or lenders and are secured by the property being purchased. Conventional mortgages have longer repayment terms, lower interest rates, and higher loan-to-value ratios than hard money loans.
Overall, the main difference between a hard money loan and a conventional mortgage is their purpose and the type of lender that provides them. Hard money loans are used for short-term financing needs, while conventional mortgages are used for long-term financing needs. Hard money loans are typically provided by private investors or companies, while conventional mortgages are provided by traditional banks or lenders.
Interest rates and costs associated with a hard money loan can vary depending on several factors, including the lender, the loan amount, the property type, and the borrower's creditworthiness. In general, hard money loans tend to have higher interest rates and fees than traditional loans because they are considered higher risk.
Interest rates: Hard money loan interest rates typically range from 10% to 18%, although they can be higher in some cases. The rate is usually calculated on a monthly basis and is based on the loan amount, the property's value, and the borrower's creditworthiness. The interest rate is typically fixed for the term of the loan, which is usually between six months and one year.
Fees: In addition to the interest rate, hard money loans may also come with various fees, including origination fees, processing fees, underwriting fees, and closing costs. These fees can add up quickly and can range from 1% to 10% of the loan amount.
Points: Hard money lenders may also charge "points," which are upfront fees that are calculated as a percentage of the loan amount. For example, a lender might charge two points, which would be equal to 2% of the loan amount. Points are typically paid at closing and are used to cover the lender's expenses and profit on the loan.
Prepayment penalties: Some hard money lenders may also charge prepayment penalties if the borrower pays off the loan early. These penalties can be significant and can discourage borrowers from refinancing or selling the property.
It's important to carefully review all fees and costs associated with a hard money loan before agreeing to the terms. Be sure to compare rates and fees from multiple lenders to find the best deal for your situation.