How to Refinance a Hard Money Loan?

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Hard money loans are a great way to tackle your financial needs, but they are acquired for the short term and thus require an investor to come up with a way to refinance them. The refinancing can be to further invest in a project, purchase another property, finance the repairs, pay off the existing loan, or pay for any other debts or expenses.  

The refinancing rates have been going down recently. A report by credible states that the latest refinancing rates are as follows:

  1. 30-year fixed-rate refinance: 2.750% 
  2. 20-year fixed-rate refinance: 2.750% 
  3. 15-year fixed-rate refinance: 2.125% 
  4. 10-year fixed-rate refinance: 2.125%

The mortgage lender will also verify your finances in order to determine the interest rate to be charged on your refinance. This may require a borrower to present the following documents:

  1. Proof of income, 
  2. Title insurance, and 
  3. Homeowners insurance. 

These documents can ensure a lender that you are capable of making future payments. The lender will get an idea of your financial status and offer a lower interest rate if you show less risk.  

There are multiple options available to refinance your existing hard money loan such as, 

1. Fixed mortgage

Popular amongst investors using the brrrr method (buy, rehab, rent, refinance, repeat), a fixed mortgage is a great option to refinance your property. Once you are done with all the repairs and renovation on the property and it’s ready to be sold, you should consider opting for a fixed mortgage to refinance and avoid excessive holding costs of the hard money loans. 

Refinancing will allow you to pay off the existing hard money loan and replace it with a long-term fixed mortgage loan. Taking up a mortgage loan will not only allow you a higher interest rate but also will stabilize your cash flow.

2. Subprime loans

For those with a below-average credit score (below 640) and a higher debt-to-income ratio, the subprime lending market offers multiple options. These lenders work with investors to provide alternative forms of loans such as an adjustable-rate mortgage or an interest-only mortgage. These types of loans usually have higher interest rates and short-term loan maturities. Investors that do not qualify for a traditional fixed income loan go for subprime loans. Investors can opt for the following subprime loan options:

  • Adjustable-rate mortgages (ARM)
  • Fixed-rate mortgages
  • Interest-only mortgages
  • Dignity subprime loan

3. Home equity loan

Using home equity loans to refinance is best suitable for investors who own a couple of rental properties and have invested a significant amount of cash to build equity in the property. Investors can use the equity they have built on their property over years to refinance it. 

If the existing hard money loan was not designed to pay for the property, you can opt for home equity loans to pay it off. Taking advantage of the equity built on the home, investors can refinance their hard money loan with another loan that offers a low rate of interest and a longer repayment schedule.  

4. Hard money bridge loans

Taking up another hard money loan to refinance an existing one can be a better solution for homeowners who are in foreclosure or borrowers who are facing a due date on their original hard money loan. The hard money bridge loan can be used to pay off the foreclosure. Allowing you to get the extra time to sell a property or fix your credit score and opt for a long-term loan with low interest rates. 

5. Cash Advance

A cash advance loan can be a great option to pay off your original hard money loan of a relatively smaller amount that has a close due date. This option has higher interest rates compared to other loans. Cash advance loans can be obtained within 24 hours, depending on the credit score of a borrower. 

Cash advance loans are considered a last resort because of the risk of high interest rates and lack of commitment towards fixed maturity. 

When Should You Refinance a Hard Money Loan?

Investors can use refinancing for different reasons. The primary reason can be to replace the existing hard money loan with a conventional mortgage loan. Let us explore more reasons when you should consider refinancing. 

Your original hard money loan is about to mature

The most common reason to refinance is when your loan is about to mature but the rehab is yet to complete. The loan rates after their maturity can be excessive and may affect your profit. In this situation, refinancing is used to get out of the existing hard money loan. 

You ran out of money to complete rehab

In some cases, an investor may run out of money to complete their rehab project. You can take a loan from another hard money lender and refinance your existing hard money loan to finish the repairs.   

You have an investment opportunity

Another reason to refinance is you get an opportunity to invest in another real estate. Once the existing property is done with renovations and on market for sale, your money is stuck in the property. So refinancing with another loan can be a good idea to invest in another lucrative real estate investment opportunity.    

What are the Things to Consider when Refinancing? 

Credit score

Make sure to check your current credit score before opting for a refinancing program. The chances of getting better terms of refinancing depend on your present credit score. Though the required credit score for refinancing may vary by the loan program you opt for, investors can assume an average credit score of 620 to qualify for a refinance. Most of the lenders offer lower refinance interest rates to investors with a higher credit score.   

Seasoning period

The seasoning period is a duration you’ll need to own a property before a bank can lend you on the appraised value. Investors are recommended to always borrow on the appraised value of the property. Banks can require an average seasoning period of 3 to 6 months in order to provide you a loan. 

Appraisal of the property

Home appraisal plays a key role in refinancing as it ensures a bank to not lend a borrower more than the worth of a property. The appraisal is carried out by a licensed appraiser and costs between $300 to $500. The appraiser will look for the following things in the property:  

  1. Measuring the accurate dimensions of the property
  2. Examine the functionality of all the amenities
  3. Taking pictures of the interior, exterior, and garage
  4. Checking the overall condition of the property
  5. Compare the neighboring properties

The appraiser will then provide an unbiased opinion on the price your property can achieve when put on the market for sale. 

Cash-out refinance

If you are an investor and deal mostly in rental properties or who wants to extend their real estate portfolio using the brrrr method, then make sure to opt for a cash-out refinance rather than a debt-only one. Cash-out refinance is taken on the equity you’ve built up over time in your rental property to provide you with cash in exchange for a new home loan. Cash-out refinancing allows you to borrow a bigger amount than you owe in the existing loan. 

Make sure the property is ready to rent

If an investor is looking at the end of their hard money loan, they should make sure to complete the renovations before it expires. Make sure that the property has no maintenance requirements and is ready to be rented to a prospective tenant. This will allow an investor to have ample time at their hand to find the right refinancing option.  

The Bottom Line

Hard money loans are great as a temporary solution to finance your real estate investment projects. Investors will have to plan for refinancing in order to lower their interest rates (APR), have a longer duration to repay, and have a low monthly payment. If you still have doubts, experts like 14th Street Capital can guide you through the refinancing process. 14th Street Capital offers attractive refinancing terms to get you the most out of your investment.