Research what makes hard money so attractive to certain types of borrowers, and you will find plenty of posts talking about speed. I know. I have written many of them myself. Speed is an important factor, especially among real estate investors who generally don’t have time to waste. But there are other things about hard money that make it attractive.
For the record, nearly all hard money and bridge loans go to either real estate investors or businesses. Neither financing option is really appropriate for consumer purposes. Without said, here are two little known things – above and beyond speed – that make hard money attractive:
1. Interest-Only Payments
Private lenders, like Salt Lake City’s Actium Lending, are free to structure their hard money loans in any way they see fit. Actium says that the most common structure is the interest-only loan. It is a structure that is good for both lenders and borrowers.
An interest-only loan is structured so that borrowers make monthly interest payments. No amount of a monthly payment goes toward paying the principal. Instead, the entire principle is due with the final interest payment.
Why Borrowers Appreciate It
Borrowers appreciate interest-only loans for a couple of reasons. First and foremost, interest-only payments are lower payments. A borrower pays less each month, freeing up cash for other purposes. The only catch is that he needs to be able to secure enough cash to pay off the loan at maturity.
A second advantage of the interest-only structure is related to its short-term nature. Unlike residential mortgages, hard money loans do not come with terms of 20-30 years. In fact, terms rarely exceed 24 months. Think about this from the aspect of total interest paid.
A hard money loan with a 12-month term assesses total interest on an annual basis. The borrower pays a single year’s worth of interest and then pays off the loan. But a 30-year mortgage amortizes interest over the entire life of a loan. A homeowner pays a lot more interest over 30 years compared to a hard money borrower paying interest for just one year.
2. No Early Repayment Penalty
Although there are exceptions to the rule, your typical hard money loan has no early repayment penalty attached to it. This gives borrowers more flexibility in terms of when they repay. Lenders don’t mind because early repayment immediately puts an end to all risk. Borrowers appreciate it because they can settle up and move on more quickly.
Some consumer loans also come without early repayment penalties. But they are the exception rather than the rule. Institutional lenders don’t like to lose out on interest payments. That is where they make their money. So when borrowers want to repay early, lenders are more than happy to charge a penalty.
A penalty does one of two things. It either convinces the borrower not to repay early or it makes up for some of the interest the lender loses out on. Either way, early repayment penalties are not something you find most consumers terribly in love with.
Nothing Is Set in Stone
Understand that nothing you have read in this post is set in stone. Again, hard money lenders have considerable leeway in how they structure their loans. As long as the lender and borrower agree, hard money can be structured in an endless number of ways.
Still, interest-only payments and loans free of early repayment penalties are common in the hard money industry. Combined with speed, these two factors make hard money attractive to real estate investors, business owners, and other types of commercial borrowers.
