What is a Hard Money Loan?
A hard money loan is a type of short-term, asset-based financing primarily used by real estate investors for property acquisitions, renovations, and fix-and-flip projects. Unlike conventional bank loans that focus heavily on the borrower's creditworthiness and income, hard money lenders base their decisions primarily on the value of the property being used as collateral.
Hard money loans are typically provided by private lenders or investment groups rather than traditional banks. This allows for faster approval times—often within days rather than weeks—making them ideal for competitive real estate markets where speed is critical to winning deals.
The trade-off for this speed and flexibility is cost. Hard money loans carry significantly higher interest rates (typically 10-15%+) and upfront fees (2-5 points) compared to conventional mortgages. They are designed as bridge financing—a temporary solution to acquire and improve a property before refinancing into a long-term loan or selling for profit.
How This Calculator Works
Our Hard Money Loan Calculator helps you analyze the true cost of a fix-and-flip or bridge loan scenario. Here's what each output means:
Monthly Payment (Interest Only)
Most hard money loans are structured as interest-only during the loan term, with the full principal due at maturity (a "balloon payment"). Your monthly payment is calculated as:
Monthly Payment = Loan Amount × (Interest Rate ÷ 12)
For example, a $400,000 loan at 12% would have a monthly interest payment of $4,000.
Total Cash to Close
This represents the total upfront capital you need to close the deal:
- Down Payment: Purchase Price minus the Loan Amount
- Origination Points: A percentage of the loan (e.g., 2 points on a $400,000 loan = $8,000)
- Other Closing Costs: Title insurance, appraisal, legal fees, etc.
Estimated Net Profit
This is the projected profit on your flip, calculated as:
Net Profit = ARV − Purchase Price − Rehab Budget − Total Loan Cost − Cash to Close
The After Repair Value (ARV) is your expected sale price after renovations. A positive net profit indicates a potentially viable deal; a negative number is a red flag.
When Should You Use Hard Money?
Hard money loans are not for everyone. They are best suited for specific situations where speed and flexibility outweigh the higher cost of capital:
- Fix-and-Flip Projects: When you plan to buy, renovate, and sell a property within 6-12 months. The short hold period minimizes interest expense.
- Auction Purchases: Properties bought at foreclosure auctions often require all-cash or fast financing. Hard money can fund these deals in days.
- Bridge Financing: When you need to close quickly on a new property before selling an existing one, hard money can "bridge" the gap.
- Properties Ineligible for Conventional Loans: Distressed properties, those with title issues, or buildings in poor condition often don't qualify for bank financing but can be funded with hard money.
- Borrowers with Credit Challenges: If your credit score or income documentation isn't strong enough for traditional lending, hard money lenders may still approve you based on the asset.
Hard Money vs. Conventional Loans: A Comparison
| Feature | Hard Money | Conventional |
|---|---|---|
| Approval Time | Days (3-10) | Weeks (30-60) |
| Interest Rate | 10-15%+ | 6-8% |
| Loan Term | 6-24 months | 15-30 years |
| Down Payment | 20-30% | 20-25% |
| Credit Focus | Asset-Based | Credit Score & Income |
| Best For | Flips, Bridge, Distressed | Buy-and-Hold, Owner-Occupied |
Frequently Asked Questions
What are "points" in hard money lending?
Points are upfront fees charged as a percentage of the loan amount. One "point" equals 1% of the loan. For a $500,000 loan with 2 points, you'd pay $10,000 at closing. Points compensate the lender for the risk and administrative cost of the short-term loan.
Can I use hard money for rental properties?
Yes, but it's typically used as a bridge. You might use hard money to acquire and stabilize a rental property quickly, then refinance into a conventional or DSCR loan once the property is leased and generating income. Holding a rental long-term on hard money would be prohibitively expensive.
What happens if I can't repay the loan on time?
Hard money loans are secured by the property. If you default, the lender can foreclose and take ownership. Many lenders offer short extensions (for a fee), but you should always have a clear exit strategy—either sell or refinance—before the term ends.
How do I find a hard money lender?
Hard money lenders operate locally and nationally. Real estate investment groups, online lending platforms, and referrals from real estate agents or title companies are common sources. Always compare rates, points, fees, and terms from multiple lenders before committing.
What LTV do hard money lenders typically offer?
Most hard money lenders cap their Loan-to-Value (LTV) ratio at 65-75% of the property's current value, or up to 70-80% of the After Repair Value (ARV). This means you'll need a significant down payment or equity to qualify.