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When considering a hard money loan, it’s crucial to thoroughly evaluate the loan proposal to ensure it meets your financial needs and objectives. Hard money loans, typically used for real estate investments, come with specific terms and conditions that can significantly impact your project’s profitability. Here’s a detailed guide on what to look for in a hard money loan proposal:
These are upfront fees charged by the lender, typically expressed as a percentage of the loan amount. One point equals 1% of the loan. Understanding how many points are being charged helps you evaluate the cost of obtaining the loan.
– Compare points across different lenders to ensure competitive pricing.
– Calculate the total cost to understand the impact on your initial investment.
The interest rate determines the cost of borrowing. Hard money loans usually have higher interest rates compared to traditional loans due to the increased risk.
– Fixed Rate: The interest rate remains constant throughout the loan term, providing predictable payments.
– Variable Rate: The interest rate can change, usually tied to an index. This can lead to fluctuating payments.
– Determine if the rate is fixed or variable.
– Understand the implications of a variable rate on your future payments.
Other Fees:
Hard money loans often come with various additional fees, such as:
– Origination Fees: Charged for processing the loan.
– Underwriting Fees: Costs for evaluating the loan application.
– Legal Fees: For preparing loan documents.
– Servicing Fees: For managing the loan post-closing.
– Request a detailed breakdown of all fees.
– Factor these costs into your overall budget.
Prepayment Penalty:
Some loans include penalties for paying off the loan early. This can affect your exit strategy if you plan to sell or refinance the property before the loan term ends.
– Confirm if there is a prepayment penalty.
– Understand the penalty amount and terms.
Hard money loans can have different payment structures:
– Interest-Only Payments: Lower monthly payments, with the principal repaid at the end of the loan term.
– Principal and Interest Payments: Higher monthly payments but gradually reduce the loan balance.
– Assess which payment structure aligns with your cash flow and investment strategy.
– Calculate the monthly payments for both options to understand the financial commitment.
Loan Term
The loan term is the length of time you have to repay the loan, typically ranging from 6 months to a few years.
Extension Options:
Some loans offer the ability to extend the term if needed, often for an additional fee.
– Determine the initial loan term.
– Understand the conditions and costs for extending the loan.
Payment Management:
Knowing who to make payments to after closing is crucial for maintaining a smooth repayment process. This can include:
– Direct payments to the lender.
– Payments managed through a loan servicing company.
– Confirm the payment process and recipient.
– Ensure you have clear contact information for any post-closing questions or issues.
Evaluating a hard money loan proposal requires a thorough understanding of its terms and conditions. By paying attention to upfront lender points, interest rates, additional fees, prepayment penalties, payment types, loan terms, extension options, and payment management, you can make an informed decision that aligns with your investment goals. This due diligence will help you avoid unexpected costs and ensure the loan supports your real estate investment strategy effectively.
TaliMar Financial is a private mortgage fund that offers investors the ability to participate in the growing market of private real estate debt. Since 2008, TaliMar Financial I has focused on providing real estate investors and operators with the capital they need to purchase, renovate, and operate residential and commercial properties. Our experienced executive team has funded over $450 million in short term debt secured on residential and commercial real estate primarily throughout Southern California and has returned over $40 million to investors in monthly distributions.
Disclosure: This advertisement is for informational purposes only and does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can only be made by the Private Placement Memorandum (“PPM”) and related subscription documents. Any investment in TaliMar Income Fund I involves significant risk. You should not enter into any transactions unless you fully understand all such risks and have independently determined that such transactions are appropriate for you. Business Purpose Loans arranged through TaliMar Income Fund I, LLC (DFPI CFL License No. 60DBO-137778).
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