If you’re buying an investment property, you’ll most likely need to borrow. Most people start by making an appointment at their bank. That isn’t always the best move. Depending on what you’re buying and how quickly you need to close, a hard money or private money loan may suit the deal better.
Here’s how the three compare.
Hard money vs. private money
Strictly speaking, a private loan comes from an individual, such as a friend, a relative or an acquaintance. If your parents lend you $10,000 to buy a car, that’s a private loan.
A hard money loan comes from a lending company and is secured by real estate. The lender relies on the property as collateral, which is why these are also called asset-based loans.
In everyday conversation, people use the two terms interchangeably, and you’ll often hear hard money lenders described as private lenders. When you’re comparing offers, what counts is who is lending, what secures the loan and what the terms are.
Hard money loans vs. traditional mortgages
There’s nothing wrong with a traditional mortgage. For a home you plan to live in for years, it’s usually the cheapest way to borrow.
The drawback for investors is time. Bank underwriting can take a month or longer, and a seller with several offers may not wait. A hard money loan can close much faster because the decision rests mainly on the property.
The trade-off is cost. Hard money carries higher interest rates and shorter terms than a mortgage. You’re paying for speed and flexibility, and that only makes sense when the deal can support it.
In short:
- Mortgage: lowest cost, slowest to close, based mostly on your income and credit
- Hard money: higher cost, fast to close, based mostly on the property
- Private money: terms depend entirely on the individual lending it
When to choose a hard money lender
Hard money fits short-term projects best: new construction, or a property you intend to fix and flip.
For a long-term hold, such as a tenant-occupied rental, ask yourself whether you need the money sooner than a bank can deliver it. If you’re set on a particular property and worried the funds won’t arrive in time to compete, a reputable hard money lender can get you to the closing table. Many investors then refinance into a conventional loan afterward.
Learn more
For the details of how these loans work, read everything you need to know about hard money loans and what’s needed to secure a hard money loan. When you’re ready to talk about a specific deal, contact Sachem Lending.
