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.
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.
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.
“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.