Figuring out what to expect from a loan offer before you apply can be tough when the loan in question is a hard money loan. When you go with traditional lending, the banks and credit unions in that market tend to compete closely, even at the national level. Things are different when it comes to private lending, though.
Private money loan interest rates tend to respond to competition, so they fluctuate more based on how many hard money lenders are in a given area than on fluctuations in the Federal interest rate. Of course, the Federal rate is taken into account, it’s just less important than remaining competitive in crowded markets, especially since private lenders don’t rely on Treasury loans to operate.
Interest Rates and Points in 2020
Since bridge loans from private lenders are riskier on the lender’s side than traditional bank loans, they do tend too be more expensive, even where competition holds costs down. Nationally, you can expect lenders to range between 11 and 15% right now, with those rates tending to rise and fall alongside traditional real estate loans during credit market fluctuations. Typically, financing charges are an additional 2-4 points, although you may find lenders running specials like waived closing costs on loans with qualifying LTV numbers.
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You can influence the quoted interest rates on hard money loans in a few ways. Private money lenders interest rates depend on perceived risk, so financing a property worth more than you need for the loan does a lot to offset that risk. If you need $70,000 and you finance a property with $140,000 in equity to get it, for example, the lender has a strong assurance they will recoup the investment even if you default. That translates to much lower interest rates.
Improving your credit score is also a way to lower the quoted rate, although it does less for bridge loan quotes than it does for traditional loans. Your credit score is still used as a gauge of risk by private lenders, but the value of your collateral and your immediate financial health is much more important.
Rates and Loan Terms
Interest rates for private loans are linked to the length of the loan term, just like traditional loans. Since they tend to be more expensive, increasing the length of the term also tends to increase the cost of interest more than it would for a traditional 20-year commercial mortgage. Six month loans tend to be the least expensive, with year-long loans close behind. You can get loans in the two to five year range if you look for them, but after the 1-year mark they get considerably more expensive with every additional six-month window added.
How To Find the Best Rates on Bridge Loans
Many private money lenders keep their rates competitive with their busiest markets but provide loans in a much wider area. For example, North Coast Financial hard money lenders operate throughout California, which generally has low rates for private loans, but the company’s rates are cued to the hyper-competitive markets in major cities like Los Angeles and San Francisco. Check out the rates available from lenders in these areas, and then check out whether they cover properties elsewhere in the state if you want to find a lender capable of providing you with the best rates in the current market.
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