The True Cost of Hard Money Loans

Hard money loans present an option to finance deals of real estate investors who are unable to get a traditional loan. But most new investors don’t know about the costs involved in getting a hard money loan.

Here I’m going to break down the costs involved in getting a hard money loan so that you can decide if this is the right financing option for you. You can also watch the video I made about this topic.

Origination Fees

Charged by the lender for creating the loan for you, origination fees can be 1-2% of your total loan amount. You’d usually hear origination fees referred to as points. If you hear 1.5 points it means 1.5% of the loan amount which is charged right from the start.

But if you used a broker, he might slap on 1-2% on top of the lender’s origination fees. That means, your total origination fees will be 3-4%.

Processing Fees or Appraisal Fees

Another fee that the lender charges is a processing fee of $1,500. This is to write the documentation and get an appraiser to your property.

But if you have the right sales agent though, you can negotiate for part or all the fee to be removed.

Monthly Interest

Every month, you have to make interest-only mortgage payments. Interest rates are 10% on average. This is much higher than the interest rates of FHA and conforming loans.

Construction Loan Costs

Some people also take out a construction loan with their hard money loan. This is also charged a 1% origination fee plus $1,000 closing costs which are charged immediately.

But construction loans are not given immediately in full, but are instead reimbursed in draws. Reimbursement is done only after you’ve completed a phase. The lender will send out an inspector to check before approving the reimbursement.

You can choose how many draws there will be. But take note that every time the inspector comes to check, you are charged $200-250 for the inspector’s time.

Servicing Fees

Lenders usually create an organization that handles your payments. This makes it easy for you to pay through the web and even use auto-pay or ePay.

Using this service charges you $10-50 each time depending on the loan amount.

Late Fees

If you forget to pay on time, you will be charged late fees which add 10% based on whatever balance you have left. So make sure that you’ve already set up auto-pay to pay every 15th of the month or whenever is your due date.

Is A Hard Money Loan Worth It?

Now that you have an idea of the costs involved in getting a hard money loan, you may wonder whether it is even worth it to get one. Well, that all depends on the profit of your deal. If your deal has very slim profit margins, then no, it won’t be worth it.

Here’s an example that takes a look at your margins from a deal using my Property Analysis Calculator.

• Purchase Price: $1,000,000
• Loan Amount: $ 800,000
• Constructions Costs: $ 100,000 at 100% financing
• Origination Fee: $ 9,000 (1 point or 1%)
• Down Payment: $200,000 (20% down payment)
• Hard Money Interest Rate: 10%

With those terms, you’d have to pay $ 9,000 upfront in origination fees for both the hard money loan and the construction loan. Your loan interest for 5 months is estimated at $37,500.

If you were to sell your property for $1,450,000, you would make a profit of $197,000.

I suggest you sign up for my weekly newsletter to get my free Property Analysis Calculator. Then you can try using it to compute the margins based on what I’ve laid down above.

But take note, my Property Analysis Calculator does not include the processing fee, smaller costs like servicing fees, and computes the interest payments based on a lump sum.

Hard money loans offer you the ability to do bigger deals. Even if you have a well-paying job, it might be difficult to buy a house in the Bay Area. Just make sure that the deal will have the big margins you’d need.

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