With nearly 42.6% of all the flipped houses being purchased with financing in Q3 of 2020, a significant number of real estate investors seem to be inclined towards acquiring loans to finance their real estate investment projects.
Whenever you take a loan, the terms will be established with the lender depending on how you are going to repay the loan, what will be the interest rate, and the duration of the loan. Borrowers can obtain an amortization schedule to precisely track and plan on how much they owe to a lender and how the loan will be repaid.
Amortization refers to the scheduling of a loan into a series of equal payments. Each installment of your hard money loan is further divided into two main portions; the first portion covers the interest rates and the remaining portion is paid against the outstanding loan principal.
How Do Hard Money Lenders Amortize a Loan?
The asset-based hard money loans are short-term loans that come with a minimum term of 6 months and up to 36 months. Investors choose to get a hard money loan when they need to build capital in a shorter time. Generally, hard money lenders provide interest-only loans with a balloon payment at the end of the loan. Most of the hard money loans have a lower monthly payment as you only pay the interest on it.
Hard money loans can be amortized as 10/30 or 15/30 mortgages with a fixed interest rate for the first 10 or 15 years of the loan, where ‘30’ refers to the amortization period and ‘10’ or ‘15’ is the term of the loan. Here the duration of the loan will be of 10 or 15 years, but the payments will be charged as per a 30-year loan. Investors have the advantage of getting lower monthly payments as it is considered that the balance is being paid in 30 years. In the first 10 or 15 years of the loan, the borrower will pay a monthly payment of which a portion will go towards the interest and the remaining portion towards the principal.
This means the loan will come due in 10 or 15 years, after that period a borrower will have to refinance the loan with another one or sell the property in order to pay off the existing loan. The remaining amount of the loan can be paid in full as a balloon payment or be further amortized and paid in the remaining years. The amortization terms of hard money loans are very much similar to the traditional loans, just that the interest rates differ from lender to lender.
How Does Amortization Work?
To better understand the amortization schedule of your hard money loan, you can take the help of the amortization table usually provided with your loan documents. An amortization table includes all the information related to the loan. It lists out your monthly payment and how much it will go to the interest rate and how much to the principal amount.
An amortization table will generally include the following information:
1. Payment schedule
The required monthly payments are listed out in the table according to every month for the life of your loan.
2. Interest charge
A portion of your monthly payment goes towards the interest charged on the loan. The interest charged on a hard money loan may vary by the predetermined interest rate laid out by the lender.
3. Principal repayment
After applying the interest charge, the remaining amount of each scheduled payment goes towards paying off the principal. This is the only portion that reduces the outstanding loan balance.
Let’s have a look at an example, consider a $165,000 fully amortized loan with a 15-year term and a fixed interest rate of 12% per annum. The amortization schedule for the first six months and the last six months of the loan can be determined by the following amortization table.
| Payment Date | Payment | Principal | Interest | Total Interest | Balance |
| Aug 2021 | $1,980.28 | $330.28 | $1,650.00 | $1,650.00 | $164,669.72 |
| Sep 2021 | $1,980.28 | $333.58 | $1,646.70 | $3,296.70 | $164,336.14 |
| Oct 2021 | $1,980.28 | $336.92 | $1,643.36 | $4,940.06 | $163,999.23 |
| Nov 2021 | $1,980.28 | $340.29 | $1,639.99 | $6,580.05 | $163,658.94 |
| Dec 2021 | $1,980.28 | $343.69 | $1,636.59 | $8,216.64 | $163,315.25 |
| Jan 2022 | $1,980.28 | $347.12 | $1,633.15 | $9,849.79 | $162,968.13 |
| ———— | ———— | ———— | ———— | ———— | ———— |
| Feb 2036 | $1,980.28 | $1,865.51 | $114.77 | $191,159.67 | $9,611.14 |
| Mar 2036 | $1,980.28 | $1,884.17 | $96.11 | $191,255.78 | $7,726.97 |
| Apr 2036 | $1,980.28 | $1,903.01 | $77.27 | $191,333.05 | $5,823.97 |
| May 2036 | $1,980.28 | $1,922.04 | $58.24 | $191,391.29 | $3,901.93 |
| Jun 2036 | $1,980.28 | $1,941.26 | $39.02 | $191,430.31 | $1,960.67 |
| Jul 2036 | $1,980.28 | $1,960.67 | $19.61 | $191,449.91 | $0.00 |
As per the above example, it is important to understand that the borrower will pay the same amount of $1,980.28 on each installment every month. the interest and principal will be paid off in different amounts each month. As we can see the interest of $1650 at the beginning of a loan seems on the higher side. But as time goes on and you pay more towards the principal, we can also determine that the interest gradually drops down to almost $19.61 for the last installment.
Important Factors to Consider in an Amortized Hard Money Loan:
Prepayment penalty
The important factor in an amortized hard money loan is the prepayment penalty. If a borrower pays the mortgage in full before the specified time, typically six months for the short term loans (1 to 3 years) and five for the long term loans (10/30 or 15/30 years). According to the general hard money loan terms the borrower will have to pay a prepayment penalty.
Balloon Payments
While most of the hard money lenders require a borrower to only pay the interest on the loan, balloon payment or the balance will be required to be paid at the end of the loan. In terms of an amortized hard money loan, a borrower will pay a portion of the principal amount through monthly payments. Allowing the loan to be fully paid over time.
Hard money loan rates and origination points (fees)
Hard money loans are a great alternative financing source if you are unable to get approved for a traditional loan. Real estate investors opt for them because of their flexible terms and low qualification requirement, but the costs of hard money loans are higher than the traditional loans.
The hard money loan rates are almost 4% to 8% higher than the others, which mostly depend on the loan program you choose. Also, the interest rate for purchasing a property can be different from the interest rate for a fix and flip loan, depending on the duration and the purpose of the loan. In addition to that, the closing costs for hard money loans are also high and lenders may charge 2 to 3 points towards processing fees. Where 1 point is equal to 1% of the mortgage loan amount.
Takeaways
While most of the hard money loans are interest-only loans and have a shorter amortization period. In some cases, lenders can provide the facility to amortize the loans for a longer-term, likely 10/30 or 15/30 years. Opting for a hard money lender that provides all the essential information related to the loan is important.
14th Street Capital understands your financial needs and provides flexible hard money loans to meet every real estate investor’s requirements. We provide hassle-free hard money loans with minimal paperwork that ensure loan closures in 5 to 10 days. 14th Street Capital ensures transparency in each stage of the loan, right from the loan approval to its closing.