Bait and Switch in the Hard Money Business
7%-8% Interest, how can I get that?
Over the past couple of months, I have been getting a number of calls from investors telling me that they are seeing these types of headlines on the internet when they search for Hard Money Lenders.
So, of course, the first question that follows is “How can I get that rate from DHLC?” The answer is, that rate is like Bigfoot, UFO’s and The Loch Ness Monster. Some may claim they exist, but nobody has ever truly seen them…Ok, maybe these “teaser” rates aren’t quite as elusive as the things listed above, but they do have a lot of hidden fees and caveats that make them not near the advantage, and most of the time a huge disadvantage, as these lenders try to make them seem.
Let me try to clarify how these work and then compare apples to apples. Hard Money Lenders that advertise these rates are trying to get your attention, which usually works. Once you call and start asking questions, here is what you really get. In order to get the 7.99% rate, you need to have good credit, reserves of over $30,000 and there is a minimum 2 year commitment. If you want to get out of the loan prior to 24 months, there is a pre-payment penalty up to the remainder of your 2 year commitment. Let me put this in perspective for you.
For example, let’s assume you borrowed $100,000 at 7.99%, interest only. Your payment on that loan will be approx. $666 per month. If you want to sell the property or convert to traditional financing after only 6 months, your pre-payment penalty on this loan is $11,985.00. Almost $12,000 in penalties because you were so efficient that you were able to pay off your loan 18 months early. So far I have only addressed the pre-payment penalty. If you look at the chart below, these lenders have other fees such as processing fees, escrow fees, etc.
Here’s a true comparison between DHLC rates and these 7.99% rates on a typical hard money 6 month loan.
| DHLC | 7.99% “Teaser” | ||
| Loan Amount | $100,000.00 | $100,000.00 | |
| Interest Rate | 13.00% | 7.99% | |
| Origination Points | $3,000.00 | $2,500.00 | |
| Document Prep Fee | $450.00 | $0.00 | |
| Appraisal and Inspection | $520.00 | $750.00 | |
| Processing fee | $0.00 | $1,850.00 | |
| Escrow Fee | $0.00 | $350.00 | |
| Penalty for rehab not being completed in 45 days | $0.00 | $1,000.00 | |
| Pre-payment Penalty | |||
| –Penalty if loan paid within 6 months | $0.00 | $11,985.00 | |
| 6 months of payments | $6,500.00 | $3,995.00 | |
| Total cost of Loan for 6 months* | $10,470.00 | $22,430.00 | |
| * Does not include Title company closing costs |
As you can see, these so called “great rates” are not so great. That 7.99% rate costs you an additional $11,000 in 6 months. Like most things in life, if it seems too good to be true, then it probably is! Make sure you ask plenty of questions so you know up front exactly what you are getting.
If you want honesty and no shell games, please give DHLC a call.
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