Formula for Paying Hard Money Loans: Guide for Property Investors

Change your hard money loan repayments with this guide for property investors. Despite being a game changer with their quick approval times and flexible terms, defaulting on money loans is easy. Unlike bank mortgage repayments that are more long-term, hard money loans are short-term, making it easier to miss your payment deadline and incur fees. Continue reading this guide as it may help you determine the best way to repay your loans while staying on top of your finances. 

What is a Hard Money Loan?

Hard money loans provide quick access to capital with a higher interest rate compared to traditional loan providers since they are short-term asset-based loans. Real estate investors who have a low credit score and limited time frame can access opportunities by applying for a hard money loan. Research flexible hard money lenders in Baltimore MD that can offer terms that will meet your investment goals to find ways to customize your loan. 

How do Fees Impact the Total Cost of a Hard Money Loan? 

1. Origination Fees 

List down the added costs of origination fees to your loan’s upfront costs. Aside from charging for interest on the loan, lenders charge a one-time fee to cover processing and administrative costs. On average, this fee typically accounts for 1-3% of the loan amount, reducing the funds available for your project. 

2. Prepayment Penalties 

Avoid prepayment penalties by planning your loan repayments. It can also be a good idea to pay off your loans and avoid extra interest. Some lenders can make early repayment more expensive by implementing mandated prepayment penalties if you’re lucky enough to secure refinancing for your loan or resell your fixer-upper sooner than you anticipated. 

3. Closing Costs 

When finalizing a loan, various fees also need to be settled. Before getting funding for your real estate project, you need to go through a process lenders call closing costs and that includes fees for appraisal, title insurance, and recording fees. While these added expenses have no impact on your interest, they ultimately increase the total borrowing cost of your loan. 

Formula for Paying Hard Money Loans

1. Understand the Structure 

Find out the structure of your hard money loan to figure out the best way to repay it. Most loans allow investors to repay it in equal parts until it is complete, unlike hard money loans that typically use a balloon payment structure. Here you pay only the interest per month and a lump sum of the principal at the end of the loan term. Hard money loan borrowers often prefer this model because it allows them to pay off the loans when their resale or refinancing is complete. However, it's essential to double-check with your lender to ensure you understand the structure. 

2. Calculate the Monthly Interest 

For example, if you borrow $100,000 at a 12% interest rate for 12 months, your monthly interest payment would be:

Monthly Interest Payment = ($100,000 * 12%) / 12 = $1,000

3. Repay the Principal 

Figure out the best approach to fund your lump sum repayment. At the end of your loan term, you'll need to repay the bulky principal amount you borrowed, which is often where most real estate investors default. It would be wise to plan ahead by solidifying your exit strategy. If you’re planning to use the money for a fix and flip, create a timeline that includes contingencies and delays in your renovation. On the other hand, if you plan to recoup your profits long-term through a rental property, look for refinancing opportunities that give you that option and the funds to repay the loan principal on time. 

4. Evaluate the Profit 

Ensure the property’s resale or rental value can cover the total loan cost and provide a profit. It’s essential to run your numbers at several points during the loan process to ensure you make a tidy profit and don't end up working for the lenders. The common formula to use is:

Profit = After Repair Value (ARV) - (Acquisition Cost + Renovation Cost + Total Loan Cost)

Remember to also account for added fees and closing costs in calculating your total loan cost to get an accurate figure.  

Total Loan Cost = Principle Amount + Monthly Interest Payment + Origination Fees + Closing Costs + Prepayment Penalties (if applicable). 

With these formulas, you should be able to determine your profit and figure out the best way to finance and pay off your hard loans.  

Make the hard money loan work for you by effectively managing your repayments. Hard money loans are an excellent way to secure quick funding for a real estate project, even when you have a bad credit score. However, their high interest rates and even shorter loan terms can make it difficult for investors to meet up with their repayment timeline. That's why it's essential to plan ahead, use the right formulas to get the correct figures to create an accurate repayment plan. 

Related Article:

• The Advantages and Disadvantages of Using Hard Money Loans for Commercial Real Estate
• How to Strategically Utilize Loans in Need