What are Hard Money Loans

                You are probably wondering what a hard money loan is, and why you should care about it. It usually refers to a private money loan. This means that a private institution is willing to loan you money, usually in the form of the first mortgage on the house. This is due to the fact that the equity of the property guarantees that the private lender will get his money back, even if the person who has loaned has bad or no credit at all.

                On a hard money loan the interest that is repaid comes with a balloon attached to the end of the loan period. This means that the burrower will pay interest on interest. The lender will also carefully appraise a property. He needs a good Loan to Value Ratio in order to make sure that he gets his money back. The standard LTV is about 70/30 meaning that if your house is appraised at 200,000 dollars you will get a 140,000 dollars loan.

                Let’s say that for example you have been given a hard money loan of 70,000 dollars. The burrower should be able to repay his debt in two years, with 5 points at a 12 percent interest rate. This means that in two years you will have to pay back 29,300 dollars in interest alone. It is easy to see why private entrepreneurs are willing to lend hard money loans. But with the current economic crisis and with the sudden drop in property value, many hard lenders lost a lot of money. The properties have lost about 40% of their values. And with the people not being able to pay their loans, the lender must evict them and go through foreclose. This might cost him an additional 9,000 dollars. And this is before taxes and repairs if the house has been trashed by the owner before he left.