Real estate investing is a great investment strategy, but it can be very difficult to acquire and maintain real estate assets. This can make it difficult to get financing for a property purchase, or even to refinance your existing mortgage.
You may have heard the term “hard money” lending, but what does it mean? What are its benefits and drawbacks? And what other types of financing options are available to you if you’re a real estate investor?
What Is Hard Money Lending?
Hard money lending is a type of private money lending, which involves funding a real estate project with your own money. Hard money lenders are generally willing to lend larger sums of money than traditional lenders, and they often charge higher interest rates and fees.
Hard money lenders might fund real estate projects with a single large loan, or they might require multiple smaller loans that are paid off as part of the property’s purchase. In either case, the funds from hard money loans are typically raised from investors who have an interest in the project.
What Is Private Money Lending?
Private money lending is a term that’s more commonly used for short-term loans that are secured by real estates, such as the sale of a property to pay off investors’ debt. These types of loans are generally made for a short time, on a short-term basis, and usually have lower interest rates than other types of loans.
What Are Traditional Loans and What Are Bridge Loans?
Traditional loans are also known as “fixed-rate loans”. This type of loan has a set interest rate that doesn’t change over the life of the loan. For example, if you borrowed $100,000, the interest rate on the loan would be set at 5% per year. If inflation increased, this would make your monthly payment more expensive, but the actual cost of your loan would stay at $100,000. You would still pay off your $100,000 loan in five years, even if inflation increased at a faster rate than what was originally anticipated.
If you were to refinance your loan (or take out a new loan), you would likely be able to get a new fixed-rate loan. However, you might be able to get a lower interest rate on a fixed-rate loan than you could on a variable-rate loan.
Bridge loans are another type of loan that is secured by real estate. Sometimes called “bridge financing”, these loans bridge the gap between traditional loans and hard money loans until the property can be sold or refinanced.
What Is a Refinance Loan and What Are Home Equity Loans?
A refinance loan is a new loan that is used to pay off an existing loan or line of credit. It is also used when you want to pay off an existing mortgage loan using your home’s equity (the amount by which your home’s value exceeds your outstanding mortgage balance). Refinancing can be done at lower interest rates than you might be able to get on a new non-refinanced loan.
Home equity loans are similar to refinancing, but they allow you to draw down on your home’s equity in order to pay off other debts or invest in other real estate projects. For example, if you want to invest in another property, you might use home equity loans to purchase another property with cash. Or if you have credit card debt that you want to pay off, you could use home equity loans to pay down those debts and purchase other properties with cash.
Other Types of Loan Options for Real Estate Investors
- Title loan: A title loan is a short-term loan that is issued through the state’s title company and is secured by a lien on your property. The amount borrowed varies by state, but most title companies will allow up to $1,000 for a title loan.
- Home equity line: A home equity line of credit (HELOC) is a revolving line of credit that allows you to borrow up to 80% of your home’s value. This type of loan has low-interest rates at first but can rise rapidly if you keep making purchases with your HELOC credit line.
- Personal loan: A personal loan is usually a short-term credit line that is granted by a bank or other financial institution.
- Cash advance: A cash advance is a short-term loan that must be repaid in one lump sum. Typically, cash advances are for small amounts such as $200 – $500, but some lenders will extend them for larger sums such as $2,000 – $5,000.
- Mortgage: A mortgage is a long-term loan that allows you to borrow against your property’s value and use the funds for other purposes.
- Manufactured housing: Manufactured housing refers to homes that were built on commercial lots with special factory construction techniques. Manufactured homes were commonly used in the second half of the 20th century as temporary housing for military personnel and their families during times of war or natural disasters.
- Equity release: An equity release is a type of reverse mortgage where you sell your home and receive a lump sum payment from the proceeds. You then use this payment to pay off any remaining mortgage balance or other debts.
- Installment loans: An installment loan is usually for smaller amounts such as $200 – $2,000 and is made up of multiple payments over time (for example, monthly payments).
Lenders offer many different types of financing options when it comes time to purchase or refinance real estate investments. Understanding the various types of financing options available to you will help you choose the right one for your needs and budget.