The U.S. asset-based lending has reached a total market share of over $465 billion. Investors are opting for asset-based hard money loans for real estate investment over the conventional ones considering the fact that they come with high-interest rates. Hard money loans have interest rates that range between 7% to 15%, whereas conventional loan interest rates fall between 1% to 3%.
The major reason behind the high-interest rate is the short duration of the loan and the risk involved in lending a real estate investor. The investment opportunity may seem lucrative but the lender has to make sure that they don’t face any losses in the future. As a result, the high-interest rates are levied on a hard money loan and are accepted by real estate investors.
How Is Interest Calculated on a Hard Money Loan?
Generally, hard money lenders amortize a loan and charge monthly payments to earn interest and recover the principal amount. A hard money lender will charge you the interest rate towards the borrowed money, generally known as the annual percentage rate (APR). There are mainly two ways a hard money lender will provide you a loan.
1. Interest-only Loan
A lender will only charge monthly interest on a loan for the previous month. The principal amount of the loan will remain constant and should be paid at the end of the loan term as a balloon payment. Interest-only hard money loans are generally short-term loans with a minimum term of six months and can go up to five years.
Most of the lenders provide interest-only hard money loans with a short duration. The interest rate may vary from lender to lender. There are mainly three components that sum up the monthly payments of your loan. Using that we can also calculate the total amount that will be paid towards the interest on the loan.
a. Principal amount
b. Interest rate
c. Loan term/duration
For example, if an investor is considering to take a hard money loan of $200000 and the lender imposes an annual percentage rate (APR) of 10% with a 5-year loan term. The total interest amount can be carried out by the following simple formula.
Principal amount x Interest rate x Loan term
$200000 x .10 x 5 = $100000
To understand the monthly payments that will be charged on your loan we can further divide the total interest rate by the total months of the loan term. This is,
$100000 / 60 months = $1666.66
2. Principal and Interest Loan
A lender will charge monthly payments in this type of loan that will be shared partly towards the interest rate and the remaining principal amount. These types of loans are amortized by a hard money lender according to the 10/30 or 15/30 mortgages. Where the loan term is of 10 or 15 years, but the payments will be charged as per a 30-year loan. These loans have a fixed interest rate for the first 10 or 15 years of the loan term.
For example, consider a hard money loan of $150000 with a 15-year term and a fixed interest rate of 12% per annum. Following is the schedule (amortization table) of the loan that includes the monthly payments, principal amount, interest charge, total interest amount, and the total balance amount.
| Payment Date | Payment | Principal | Interest | Total Interest | Balance |
| Aug 2021 | $1,800.25 | $300.25 | $1,500.00 | $1,500.00 | $149,699.75 |
| Sep 2021 | $1,800.25 | $303.25 | $1,497.00 | $2,997.00 | $149,396.49 |
| Oct 2021 | $1,800.25 | $306.29 | $1,493.96 | $4,490.96 | $149,090.21 |
| Nov 2021 | $1,800.25 | $309.35 | $1,490.90 | $5,981.86 | $148,780.86 |
| Dec 2021 | $1,800.25 | $312.44 | $1,487.81 | $7,469.67 | $148,468.41 |
| Jan 2022 | $1,800.25 | $315.57 | $1,484.68 | $8,954.36 | $148,152.84 |
| Feb 2036 | $1,800.25 | $1,695.92 | $104.33 | $173,781.52 | $8,737.40 |
| Mar 2036 | $1,800.25 | $1,712.88 | $87.37 | $173,868.89 | $7,024.52 |
| Apr 2036 | $1,800.25 | $1,730.01 | $70.25 | $173,939.14 | $5,294.51 |
| May 2036 | $1,800.25 | $1,747.31 | $52.95 | $173,992.08 | $3,547.21 |
| Jun 2036 | $1,800.25 | $1,764.78 | $35.47 | $174,027.55 | $1,782.43 |
| Jul 2036 | $1,800.25 | $1,782.43 | $17.82 | $174,045.38 | $0.00 |
An investor can understand the monthly payments and the total interest amount to be paid on the loan. According to the above example, the monthly amount here is $1800.25 which will remain constant over the life of the loan. The total interest amount to be paid here is around $174045.38 apart from the total principal amount of $150000 to be paid over the 15-year loan term.
The monthly payments will remain the same for the entire loan term; the two portions of it will cover both the interest charge and the principal amount. The interest rate at the beginning of the loan term will be on the higher side. Over time as the borrower pays more towards the principal, the interest rates will also drop gradually as the loan term comes to an end.
Hard Money Loan Amortization
Investors can have a better understanding of the amortization period by referring to the amortization table provided by the lender with the loan documents. The amortization table lists out the monthly payments, interest rates, and the remaining principal amount of the loan. The amortization table is generally obtained by considering the following terms.
1. Payment schedule
The required monthly payments schedule is levied over the term of the loan.
2. Interest charge
A portion of the monthly payment goes towards the interest on the loan. The interest rate may vary from lender to lender.
3. Principal Payment
The remaining portion of a monthly payment goes towards paying off the principal amount.
The Bottom Line
Though the interest rates of a hard money loan are on the higher side the loan terms can be defined mutually between the borrower and the lender. The interest and the principal payment are obtained by the lender in the terms of monthly payments. Where the monthly payment can have an only-interest or two portions that cover both interest and principal. Investors may have to pay a little more interest but the quick and easy access of funds to further invest in real estate is more important to them.
Investors can now easily apply for a hard money loan with a seasoned lender like 14th Street Capital. Get access to hassle-free hard money loans with minimal documentation and flexible terms. Rated amongst the best hard money lenders for investors 14th Street Capital is your best real estate investment funding source.