Hard Money Loans: What You Are Really Paying For
Hard money is fast money with points, a short term, and interest-only payments. Here is how to use it without getting stuck in it.
Investors often describe hard money as a last resort. Experienced ones describe it as a tool. The difference is whether you entered the loan with an exit already built.
How it is underwritten
The property carries the loan. A hard money lender cares about current value, after-repair value, the strength of your plan, and your liquidity to carry payments. Income documentation is minimal or nonexistent, and credit matters mostly as a signal rather than a threshold.
That is why these loans fund in days rather than weeks.
The real cost math
Compare the cost of the loan to the cost of not having it. Two points and six months of interest-only payments on a $400,000 loan runs roughly $30,000 to $40,000. If the alternative is losing a property with $120,000 of spread, the math is not close.
If the alternative is a conventional loan that closes three weeks later on a property nobody else is bidding on, the math is very close, and you should probably wait.
Plan the exit first
Before you sign, know exactly how the loan gets repaid: a sale at a specific price, a DSCR refinance at a specific rent, or a construction takeout. Get the refinance lender's parameters in writing while the hard money loan is still being drawn, because a seasoning or condition requirement discovered in month five is how investors end up extending twice.
Watch these terms
Extension fees, draw schedules and inspection turnaround times, prepayment or minimum interest provisions, and whether the lender funds rehab in arrears. Minimum interest clauses in particular can erase the savings of an early payoff.
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