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Hard Money Loans are Interest-Only and What that Means to You

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November 30, 2019 05:00 PM

One of the biggest questions people have is, “Are Arizona Hard Money Loans interest only?” Generally speaking, they are, but you should know the benefits and pitfalls before jumping in.

One of the most misunderstood forms of financing is Arizona Hard Money Loans. Unlike traditional lending options offered by banks, these deals are most often financed by individual people, so you’ll also hear the concept referred to as private money. It’s leveraged quite a bit in the real estate industry. For example, someone in the fix-and-flip business might source funds this way. A real estate investor who intends to hold his property after fixing it might also use one at the onset of a project and then apply for traditional funding later. In these cases, you may also hear it called a bridge loan.

The terms offered will vary based on a number of factors, including who the lender is and what you’re bringing to the table as well as what you need. However, in a typical situation, you’d be offered funds for a short period of time, such as 1-5 years, and during that period, you would make payments toward only the interest. When the agreed upon period ends, you’d be expected to pay off the full amount.

One other major difference is that the loan is usually secured by the property, and the amount made available to you will vary based on the value of it. The ratio is referred to as loan-to-value, or LTV. For example, if you found a property worth $100,000 and you managed to pick it up at auction for $70,000, and you got all your funding to make the purchase from a lender, your LTV would be 70%.

You Need to Have an Exit Plan to Be Successful

The reality is that Arizona Hard Money Loans aren’t ideal for every situation. Making interest-only payments can be great if you need to have more cash on hand for the duration of a project, perhaps even essential. However, you have to have a way to pay off all the principal at the end. Your loan balance will not decrease, meaning if you took out that $70,000 loan to purchase a fix-and-flip, and you do interest-only payments, you’ll be paying $70,000 when your time is up. That makes sense in an industry like fix-and-flips, where you’ll be selling the home for profit after the work is done and you’ll have a natural exit. You simply pay off the loan you took out when your payment comes in. It also makes sense if you know you’ll qualify for a conventional loan before your principal payment comes due. This might be the case if the state of the property was such that it couldn’t originally qualify or if you couldn’t wait around for funding and needed to close quickly to seal a deal.

Know how to evaluate your options and choose the best financing for the situation.

People like Arizona Hard Money Loans because they get funded fast, don’t rely on solely credit, and allow the borrower to make interest-only payments. Seasoned real estate investors often start out solely using them and then transition to other options as their credit worthiness increases. But, they will often go back to the same lender when time is of the essence or a property is in such ill repair that it won’t get funded by traditional methods. The bottom line is that it pays to be familiar with multiple forms of financing and choose what’s right for you based on the situation at hand.

About the Author: Dennis has been working in the real estate industry in some capacity for the last 44 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters and 5 amazing grandchildren. Dennis has been an Arizona resident for the past 43 years.