Should I Extend My Hard Money Loan

Should I Extend or Refinance My Hard Money Loan?

A hard money loan, sometimes referred to as a bridge loan, fix-and-flip loan, or private money loan, refers to a type of short-term real estate loan for a business or individual that is done outside of traditional credit unions or banks. It is often underwritten to the value of the property rather than the credit strength of the borrower. This type of loan is popular with real estate investors such as developers or house flippers who need access to real estate financing but cannot get a conventional bank loan.

Because hard money lenders only write loans for a short period of time, you may face an issue if the loan matures before they can repay it. If you currently have a hard money loan that is maturing, you may be asking yourself, “should I extend the existing loan or refinance with a new hard money loan?” In this article, we break down the advantages and disadvantages of extending versus refinancing your hard money loan, as well as explore some helpful questions to think about to make the best financial decision.

Advantage of Extending Your Hard Money Loan

An advantage of extending an existing hard money loan is that you can usually get through the extension approval process relatively quickly. You already have an established relationship with the lender and most likely have a positive payment history. Additionally, an extension would most likely require substantially less effort than identifying a new hard money lender and completing a full underwrite. Both of these advantages mean that the extension process is less of a headache than a full refinance.

Disadvantage of Extending Your Hard Money Loan

The primary disadvantage of a hard money loan extension, is that the extension will probably be for a period of three to six months, and not long enough for you to repay the private money loan. Most likely you obtained a hard money loan because you only needed the funds for a short period of time. This maybe because the loan was for the renovation or construction of an investment property, you needed a short term loan to close on a property quickly, or you couldn’t get approved with conventional financing because of poor credit or cash flow.

In any scenario, your original timeline to repay the loan was delayed and may require more time than a hard money loan extension may offer.

Advantage of Refinancing Your Hard Money Loan

The benefits of refinancing a hard money loan may include obtaining a longer-term loan, a better interest rate or cash out. By obtaining a new hard money loan with a longer term, you will not be stuck paying an extension fee if you are unable to repay the loan within the short extension period. Additionally, if the value of the property increased or your credit or cash flow improved, you maybe a good candidate for a new hard money loan with better terms.

Disadvantage of Refinancing Your Hard Money Loan

A disadvantage of refinancing a hard money loan is that the process can be lengthy and difficult. Not only do you have to identify a new hard money lender to refinance the existing loan, you will need to complete a new underwrite. See our article on how to identify a new lender for your hard money loan for tips on making the refinance process easier.

Questions to Think About

Applying for an extension or refinancing your hard money loan should be thought through carefully. Here are some further questions to think about when deciding to extend or refinance a hard money loan.

• How long do you need the loan for? Many extensions only allow for an additional three to six-month loan term. If you feel you will need longer to finish your project, sell the property, or refinance the loan with conventional financing, a hard money loan extension may not be the right decision.Also, it is important to keep in mind that an extension does not come without additional fees. In fact, these fees may add up to as much as a hard money loan refinance.

  Finally, if you are in the unfortunate position that your loan is funding a fix-and-flip or construction project and the project is placed on hold for an extension approval, you may be better off with a longer-term refinance.

• Has the property value or your financial condition changed? Perhaps you are the fortunate position of having the value of the property increase or your credit or cashflow has improved. If this is the case, you may be in the position to get a better loan with a lower rate, longer term, or a cash out refinance. I would always suggest reaching out to several local hard money lenders and request pricing. If the pricing is substantially better, a refinance maybe a better option, or at least leverage to obtain an extension at better terms.

• Do you need a cash-out option? A cash-out refinance might also be helpful if the borrower has a substantial amount of their own capital in a property.  If there has been a substantial increase in the value of the property because its has been renovated or your credit / cashflow has significantly improved, you may be a good candidate for a cash-out refinance. Just know, obtaining a cash out refinance is difficult as many hard money lenders view this type of transaction as very risky.

• Does your existing lender even offer an extension It is very important to know whether or not your lender even offers extensions. This is best to discuss before you close on the loan, even if you do not foresee needing an extension. If you have already signed the hard money loan and are considering the possibility of applying for an extension, be sure to inquire two to three months before the maturity to give the lender enough time to evaluate the request and you to make alternative arrangements if the request is denied. Remember, if the loan is in “good standing,” meaning the payments and property taxes are current and the insurance is active, the lender may consider the extension an acceptable risk.

Summary

If you are a borrower with a hard money loan that is maturing, it can be a difficult decision to extend your existing hard money loan or refinance into a new hard money loan. The biggest things to consider are how long do you need the loan and will an extension be long enough, will a refinance offer better loan terms, and will the effort to obtain a refinance be worth the time and expense versus obtaining an extension.  

About TaliMar Financial

TaliMar Financial is a hard money lender that specializes in funding residential and commercial fix and flip, bridge, and construction private money loans. As a direct lender, we offer aggressive funding programs for real estate investors and professionals such as real estate agents, mortgage brokers, and others in the industry. Visit talimarfinancial.com to learn more about our hard money lending programs.

Sources

“Hard Money Lenders: One Source for Unique Mortgage Situations”. BankRate.com. 31 May 2020. .

“Pros & Cons of Hard Money Loans”. TheBalance.com. 31 May 2020.

.