If you are like many people, you’ve heard of hard money loans before – but what are they, and are there any downsides to using one? This guide explains whether there are downsides to hard money loans and what you should be aware of if you’re considering borrowing with one.
Are There Downsides to Hard Money Loans?
Generally, the downsides to hard money loans are only downsides for people who aren’t real estate investors. They include the costs associated with borrowing hard money, as well as the shorter repayment period. Here is a closer look at each.
Costs of Hard Money Loans
Hard money loans are very convenient for investors who want to purchase a home at a low price, fix it up and then sell it at a profit. However, there’s a price attached to that convenience; interest rates are typically higher with hard money loans than they are with conventional mortgages. Additionally, you will most likely have to pay origination fees and closing costs it may be a bit higher than they are with conventional mortgages.
For many investors, that balances out because of the fact that they can borrow money quickly. That means they don’t have to miss out on a hot deal waiting for financing.
Related: 3 renovation mistakes that could decrease a home’s value
Hard Money Loans Have Shorter Repayment Periods Than Conventional Loans
You can’t expect to take out a hard money loan and repay it over 30 years. These are short term loans, and their purpose is to give you the money to get a property ready to go and sell at a profit quickly. You should talk to a hard money lender if you’re considering borrowing this kind of cash; that way, you’ll know exactly how long your repayment terms will be.
Related: Hard money FAQ
Who Should NOT Take Out a Hard Money Loan?
Hard money loans are not for people who want to buy a house to live in, except in very limited circumstances. These loans are typically reserved for investors who need cash quickly to jump on hot deals, as well as investors who need money to repair a home to flip it. Because the interest rates are generally higher on hard money loans than they are on conventional mortgages, and because the repayment terms are typically very short when compared to conventional mortgages, these loans are not usually ideal for people who simply want to buy a home to live in.
Do You Need a Hard Money Loan?
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