Hard money loans are an alternative financing option for real estate investors and borrowers who need quick access to capital but may not qualify for traditional bank loans. They come in two types: short-term and long-term. Understanding the differences between them is important to making an informed decision.

Short-Term Hard Money Loans

Short-term hard money loans last six months to three years, offering borrowers quick access to funds for immediate projects. With faster approvals, they appeal to investors who must act quickly in competitive markets.

Here are a few main characteristics of short-term hard money loans:

• Higher Interest Rates: These loans have higher interest rates, typically between 8% to 12% in California, due to their short duration and increased risk.
• Lower Loan-to-Value Ratio (LTV): Borrowers usually receive an LTV ratio of 60% to 70%, requiring a larger down payment than conventional loans.
• Used for Quick Returns: Investors use short-term loans for projects like house flipping or quick property improvements, expecting fast returns or refinancing.
• No Prepayment Penalties: Many short-term hard money loans allow early repayment without penalties, offering flexibility if a project finishes early.

Long-Term Hard Money Loans

Long-term hard money loans have five to thirty years of repayment, making them suitable for borrowers planning to hold a property for an extended time. They offer a more manageable repayment schedule, easing the pressure of quick returns.

Key features of long-term hard money loans include:

• Steady Interest Rates: Interest rates, typically 7% to 10% in California, are slightly lower than short-term loans but still higher than conventional mortgages, appealing to buy-and-hold investors.
• Flexible Loan Terms: These loans offer more flexibility, making them ideal for borrowers with unique financial situations or non-standard properties.
• Potential for Refinancing: Borrowers can often refinance long-term hard money loans into conventional loans, especially after improving property value or financial standing. This reduces overall interest costs.
• Less Stringent Credit Requirements: Long-term hard money lenders focus more on property value and potential income, making them accessible to borrowers with credit challenges.

Choosing between Short-Term and Long-Term Hard Money Loans

When deciding between short-term and long-term hard money loans, consider your investment’s purpose and repayment capabilities. Short-term hard money loans offer speed and flexibility if you’re flipping a property, completing a renovation, or need a bridge loan. But be prepared for higher interest rates and a faster repayment schedule.

A long-term hard money loan may be better if you plan to hold onto a property, such as a rental or commercial building, or need time to refinance through traditional channels. The longer repayment period gives you more breathing room, though the interest rates will still be higher than conventional loans.

Before proceeding, it is advisable to carefully assess the total cost of the loan, including points, interest, and any additional fees. You should also have a solid exit strategy, whether selling the property, refinancing, or generating rental income to cover payments.

Do you need fast, reliable financing for your next property? At ARC Private Lending, we offer tailored hard money loans for residential and commercial projects. Contact us to learn more!