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.
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