If you’re just entering into the world of real estate investment, you’re making an exciting choice filled with a lot of great opportunity, and an immense potential for profit. However, there’s also a lot to learn, especially on the financial side. Coming into property as a business, rather than as a one-time purchase for a home that you live in is a very different branch of knowledge and skills.
One of the things you’ll need to think about is how to fund your new venture. Unless you were born into a family of wealth, or already have a successful business with enough profits to use, you’ll need to get additional money somewhere else. For conventional, residential property purposes, usually going to a bank to secure a mortgage is enough.
But then there’s something called a hard money loan, a term you may have already heard or read about in business dealings. What is a hard money loan, and how does it differ from a mortgage?
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The one thing that a mortgage and a hard money loan share in common is that they are both loans, usually focused on property acquisition. In either case, some larger organization with the money is willing to let you borrow some money, in order to let you finance the purchase of a property.
However, one of the single biggest differentiators between a mortgage and a hard money loan is that hard money loans are generally not offered by banks. Usually a hard money loan comes from a specialized company and financial group. Hard money loans are more commercial or corporate in nature. A private individual wishing to get financing for the purpose of a home is not the target market for hard money lenders. Instead, it’s for people who have made property their business.
Aside from the source of a hard money loan, another factor that separates it from a mortgage are the different conditions that apply. Many hard money loans for example, are much shorter in term than a traditional mortgage, which can go from standard lengths like 30 years all the way up to 50.
Hard money loans are typically more in the five year range, some loans being as short as one or two years. Longer term, 30 year loans do exist, but this is for very specialized real estate investments, not typical residential requirements.
Hard money loans usually have higher interest rates, and more points about 3-6, sometimes as high as 10. Hard money loans also have a feature known as “cross collateralization” which allows business people to use more than one property as part of the collateral for the loan.
All of these differences may seem unfriendly for residential purposes and in truth, they are. This kind of transaction is designed for someone that is looking to invest and sell, and wants to do it quickly. Because of that, hard money loans are designed to facilitate a quicker loan with the expectation that there will be faster, higher returns. And if you’re just beginning your real estate investment career, these are things you’ll be learning.