What’s the Average Interest Rate on a Hard Money Loan?

In the past, hard money loans had a negative connotation. If you heard the words “hard money loan,” you may have thought about shady business dealings with questionable lenders and loans with exorbitantly high-interest rates attached to them.

Although hard money loans typically carry a higher interest rate than conventional loans due to the higher risk hard moneylenders take on, the risk of encountering a predatory lender who engages in shady business dealings is low. There are mostly reputable hard moneylenders operating in today’s market who offer interest rates that are perhaps not as sky-high as you might imagine.

If you’re new to the real estate fix and flip game, have a look below to learn what the average interest rate is on a hard money loan, and the basics of hard money loan lending.

Average Interest Rate For a Hard Money Loan

Borrowers seeking a hard money loan will, on average, receive an interest rate that ranges from 7% to 15% and points range from 2% to 4% of the total loan amount. Depending on the loan-to-value ratio, the interest rate and points can vary significantly though.

Interest rates and points charged by hard moneylenders differ from lender to lender and will also differ based on location. For example, hard money loans in California will most likely have a lower interest rate than hard money loans in Texas or other parts of the country, because California has many hard money lending firms; therefore, more competition brings a decrease in price. Regardless of the location, interest rates for hard money loans are higher than conventional loans, because of the higher risk that hard money loan lenders take on.

Principles of Hard Money Loan Lending

Hard money loans are typically short-term loans with three to 36-month terms, and rates that vary from 7.5% to 15%. Points on a hard money loan are higher than on a conventional loan and vary between 2% and 10% of the loan amount.

Hard moneylenders base the amount they lend to borrowers primarily on the value of the property that has been put up as collateral. Hard moneylenders are mostly concerned with the property’s value that is being put up as collateral, rather than the borrower’s creditworthiness.

For the most part, it’s real estate investors who obtain hard money loans and they do so for many different reasons, but mainly because hard moneylenders are able to fund the loan quickly.

Minimum Qualifications for a Hard Money Loan

As mentioned above, hard moneylenders are primarily concerned with the amount of equity the borrower has in the property they are putting up as collateral. If a borrower is turned down by a bank for a conventional loan due to a recent foreclosure or short sale, they can still obtain a hard money loan as long as they have enough equity in the property that is being used as collateral.

In addition to considering the amount of equity in real property the borrower has to use as collateral, a hard moneylender will also consider the plans the borrower has for the property they are investing in. They’ll want to see plans that include a practical way to ultimately pay off the loan, and how they’ll be improving the property and then eventually selling it.

The Bottom Line

Hard money lending rates are given by private lenders and are offered on interest-only loans with significantly higher rates than conforming rates and more flexible underwriting. Interest rates will vary based on a borrower’s equity in the property being used as collateral, the location of the property being invested in, and to a lesser extent the borrower’s qualifications such as FICO score, cash reserves, and assets.