Avoid using your profits to pay off late repayment fees by meeting your payment deadlines. For most investors, property ownership is only achievable with a loan, especially a hard money loan that gives you access to quick capital. On the flip side, these loans are notorious for having short repayment timelines coupled with high interest rates making it difficult for investors to keep their end of the bargain. Thankfully, we’ve put together the perfect strategy guide to help borrowers repay their hard money loans, so stick around:
What is the Repayment Structure on Hard Money Loans
Get a better understanding of how most lenders expect you to pay off a hard money loan to create a better repayment strategy. Not only does this information give you a solid grasp on what to expect, but it also helps you avoid pesky late or prepayment fees. So here are the most common repayment features your lender could include:
- Interest-Only Payments: Meet your monthly deadlines with ease when you opt for an interest-only payment loan. In such a scenario, lenders only expect you to make interest payments each month, with the expectation of paying the balance in full at the end of the loan term. This solution gives you a much-needed breather at the beginning of your loan term because your repayments are so little. However, it’s essential to put money aside from your sale to make the heavier final payments.
- Balloon Payments: Pay off your loan with a lump sum that covers the principal when you make a balloon payment. Many borrowers incur late fees in the final months of their loan term because they fail to prepare to make their balloon payments properly. Thus, it’s essential to have and execute your exit strategy to sell or refinance the property on time so you can pay it off without any hiccups.
- Higher Interest Rates: Prepare to pay higher interest rates to secure a hard money loan. Unlike traditional mortgages that are backed by large financial bodies, hard money loans are mostly run by private lending companies with a higher tolerance for risk. That’s why their loan approval time is often shorter with more room to accommodate borrowers with bad credit scores. On the flip side, it also means their interest rates are higher than other forms of financing, often hovering between 8% – 15% depending on the lender and property value.
- Short-Term Loans: Get approval, make your repayments, and complete your loan term all within a year with hard money loans. Another common feature of this type of financing is that they’re short-term loans, often lasting between 6 to 18 months. As a result, it can be a struggle for borrowers with poor planning skills to meet their balloon payments in such a timeline. On the other hand, borrowers who secure enough funds early risk having to pay prepayment penalties. That’s why experts recommend that when repaying hard money loans, investors should stick to the repayment schedule to avoid the risk of default.
How to Minimize Costs During Repayment
Budgeting for Other Fees
Get an accurate estimate of your monthly repayments by budgeting for other fees. Many borrowers make the mistake of planning for only the principal payments, only to come up short when other minor fees stack up and inflate their final costs. However, this oversight could be a costly mistake because it strains your finances and increases the chances of missing your deadline. That’s why it’s essential to get the full picture of your loan costs and account for additional expenses such as origination fees, appraisal fees, and closing costs.
Avoiding Prepayment Penalties
Cap your overall costs by avoiding pre-payment penalties. Paying off your loan before the deadline to avoid incurring additional interest sounds like a good idea in theory, but it isn’t always so. Sometimes lenders include prepayment penalties to dissuade borrowers from paying up too early and forcing them to forego additional income. That’s why it would be best to opt for loans without such a clause to give you the flexibility to pay off your loans sooner if you have the funds. Maryland Hard Money Lenders will determine fair and transparent loan terms during the application process.
Why Is Timing Important During Repayment of Hard Money Loans?
Market Conditions
Watch market trends closely to get the most out of your property’s sale. Despite being one of the most stable investment options, real estate isn’t immune to fluctuations and federal interest rates, seasons, and other economic conditions can influence property demands. As a result, when housing demand is higher, properties are more expensive and easier to sell off. On the other hand, when demand drops, so does your selling price which can make it more difficult to meet your target and repay your loan. That’s why it’s crucial to follow market conditions when buying, renovating, and selling your property.
Exit Strategy
Minimize your losses by creating a well-thought-out exit strategy. Besides ensuring you have enough funds to repay your loans, carefully timing your exit can help you avoid paying costly penalties or interest. Unless you plan to move into the property, most investors purchase houses with plans to turn a profit either by selling it, turning it into a rental, or refinancing it. Thus, that might require watching interest rate trends to avoid balloon payments when you choose to refinance or time your property sale to coincide with peak demand.
Conclusion
Repay your hard-earned loan with ease by understanding the loan’s repayment structure. Often borrowers are caught off guard by concepts like balloon payment, which can affect their ability to meet their deadlines and force them to pay late fees. Thus, if you want to avoid such penalties you need a thorough understanding of your lender’s repayment structure.
In addition, you can also minimize your total costs by remembering to budget for other fees. Loan repayments go beyond just the principal and interest, you also have to consider other expenses like origination and closing fees. You may also want to include prepayment penalties if you plan to pay off the loan earlier than the agreed time. Remember that timing also plays a major role in your loan repayments through fluctuating market conditions and having a well-thought-out exit strategy.
