What Are the Typical Terms and Interest Rates for Commercial Hard Money Loans?
Typical Terms of Commercial Hard Money Loans:
Loan-to-Value (LTV) Ratio:
Commercial hard money lenders determine the loan amount based on the property’s appraised value. The LTV ratio, expressed as a percentage, represents the loan amount in relation to the property’s value. LTV ratios for commercial hard money loans typically range from 60% to 75%, with some lenders offering higher percentages depending on factors such as the property type and borrower’s experience.
Loan Term:
Commercial hard money loans are short-term solutions, with loan terms typically ranging from six months to three years. The short duration aligns with the lenders’ risk mitigation strategy, as they can reevaluate the property’s value and the borrower’s performance within a relatively brief period.
Interest Rates:
The interest rates for commercial hard money loans are generally higher than those of traditional loans, reflecting the increased risk associated with this form of financing. Interest rates can range from 8% to 15% or more, depending on factors such as the borrower’s creditworthiness, the property’s condition, and market conditions.
Points:
Lenders often charge “points” upfront, with one point equal to 1% of the loan amount. These points are an additional cost to the borrower and contribute to the lender’s profitability. Points can vary but commonly range from 2 to 5 points.
Prepayment Penalties:
Commercial hard money loans may come with prepayment penalties, discouraging borrowers from paying off the loan before the agreed-upon term. Penalties can be structured in various ways, such as a percentage of the outstanding loan balance or a certain number of months’ interest.
Loan Approval Process:
Unlike traditional lenders, hard money lenders focus less on a borrower’s credit history and financial statements and more on the property’s value and potential profitability. The loan approval process is streamlined, enabling quicker access to funds.
Interest Rates
The landscape of hard money interest rates showcases a range from a modest 8.99% to a higher 14.00%. It is essential to note that the interest rates are inversely proportional to the leverage – the lower the leverage, the lower the interest rates. This principle underscores the risk-reward dynamic prevalent in the world of hard money lending.
First Trust Deeds
First trust deeds, which offer a primary claim on the property in case of default, often come with more favorable interest rates. For instance, in California, it’s not uncommon to find rates as low as 8.99% for low-leverage commercial property loans with a Loan-To-Value (LTV) ratio of up to 50%. The lower LTV signifies a lower risk for the lender, resulting in a more attractive interest rate for the borrower.
On the higher end of the spectrum, construction loans funded by mortgage funds in the Pacific Northwest may carry interest rates reaching up to 13.00%. This reflects the increased risk associated with construction projects, influencing the interest rate offered.
Second Trust Deeds
Second trust deeds, which are subordinate to the first trust deed, generally come with slightly higher interest rates. An example of this is a 9.99% interest rate for a 42% Combined LTV (CLTV) hard money home equity line of credit (HELOC) on a long-term single-family rental in Corona Del Mar, California. This scenario emphasizes the nuanced risk assessment undertaken by hard money lenders based on factors such as property location and usage.
At the upper end of the interest rate spectrum, a 14.00% second trust deed at 65% CLTV on Bainbridge Island, Washington, exemplifies the heightened risk and diminished collateral protection, leading to a higher interest rate.
Conclusion
Commercial hard money loans play a vital role in the real estate financing landscape, offering a valuable alternative to traditional lending channels. While the terms and interest rates may seem steep, the speed, flexibility, and accessibility of these loans make them an attractive option for investors and developers looking to seize time-sensitive opportunities. As with any financial decision, thorough research and due diligence are essential to ensure that the terms align with the project’s goals and the borrower’s financial strategy. By understanding the typical terms and interest rates associated with
commercial hard money loans, borrowers can navigate this financing option with confidence and make informed decisions that contribute to their success in the competitive commercial real estate market.