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A hard cash loan is a loan that is backed by the collateral that is used for purchases, usually real estate. While this sounds like a traditional mortgage loan, there are some key differences.

A hard money loan differs from a traditional mortgage in several important ways, including how it is used, the types of lenders they offer, and the interest rates and terms they offer. Here's a closer look at how they compare.

The purpose

The main difference between the two types of loan is that a hard cash loan is often used to "flip" real estate – that is, buy, repair, and sell a property for a profit – as opposed to a traditional home mortgage. A hard cash loan can also be used as a short-term "bridging loan" for a homeowner who wants to buy a new home before they can sell their old one. As soon as the old house is sold, the cash loan is paid off with the proceeds of a traditional mortgage on the new house. A classic mortgage is used for a primary residence where the buyer wants to live for many years.

The lender

Coin lenders are usually private companies or individuals. Typical mortgage lenders, on the other hand, include banks or credit unions. Since these are independent lenders, loan terms can be more flexible and you may be able to negotiate with them.

The interest rate

The interest rate on a hard cash loan is usually much higher than that of a conventional mortgage. There is also a much wider range of hard cash loan rates available. According to Freddie Mac, the average 30-year fixed-rate mortgage rate on July 22 is 2.78% APR. In contrast, the average interest rate on a hard cash loan can range from 7% to 15% annually.

In addition to a higher interest rate, a hard money loan often has higher "points" or fees that are paid when the loan is taken out or received. The points for a hard cash loan are usually at least 1% of the loan value and can be up to 4%.

The term of the loan

Most hard cash loans have short terms – usually no longer than 24 months. Some hard cash loans only have a term of eight to ten months. While you may be able to pay off one hard money loan with another if your project exceeds the loan term, you will pay fees again on the new loan.

Keep in mind

Since a hard money loan has a shorter term and a higher interest rate than a conventional mortgage, it is usually used in certain situations, such as when moving house or as a bridging loan. With their short maturities and high interest rates and fees, they can be risky for inexperienced borrowers. For example, someone renovating a home for the first time could underestimate the time it would take to renovate and risk losing the home to the lender because the loan has expired.

FAQ on hard cash loans

Here are the answers to some common questions about hard cash loans.

  • What do you need for a hard cash loan?
    • A hard money lender places more emphasis on the value of the property than on the borrower's ability to repay. Hence, the lender wants to make sure that the property has the value that you declare and that you have the appropriate equity. You may also need to demonstrate experience buying and selling real estate.
  • Do you need a deposit for a hard cash loan?
    • Yes. The down payments for hard money loans are often significantly higher than for a classic mortgage – in some cases even up to 50%. Because hard money lenders often lend to people with poor creditworthiness, they protect themselves by lending a smaller percentage of the property's value.
  • Why is it called a hard cash loan?
    • The term "hard money loan" refers to a loan that is secured by a "hard" asset such as real estate. If the borrower is unable or unable to repay the loan, the lender acquires ownership of the asset to settle the debt.

About the author

Karen Doyle is a personal finance writer with over 20 years experience writing about investing, money management, and financial planning. Her work has appeared on numerous news and finance websites including GOBankingRates, Yahoo! Finance, MSN, USA Today, CNBC, Equifax.com and more.

source https://seapointrealtors.com/2021/07/27/what-is-a-hard-money-loan/

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