How to refinance a hard money loan
Refinancing a hard money loan can be a great solution for an investor. However, depending on why you need to refinance can determine if it really is the best choice for you. It is also important to know what your options are in regards to traditional and nontraditional lenders. There are also some practical tips you can follow should you choose to refinance a hard money loan.
Situations Where Refinancing is the Practical Solution
There are a few situations where refinancing is the best solution. The most obvious reason may be because you have to pay back your hard money loan soon. Another reason may be that you have run out of money for your rehab. Maybe you want to free up your money for another business opportunity. Perhaps you bought your property with cash, but you don't have money for the rehab. Or you changed your mind and now you want to hold your property for rental income.
When the Hard Money Loan is Due
You may have not completed your rehab and now the term of the loan is due. Refinancing the hard money loan is one way to avoid paying the loan in full or be charged an extension fee. Extension fees vary from lender to lender typically they could go up to 6% of the loan amount. . When reviewing your documents, specifically the Note, you will see exactly what the rate is.
Calculate if you need just a few months or if your project is running way behind and you may need more than 6 months. If you just can finish and sell your rehab in less than 2 months it will be wiser to get the extension. On the other hand, if you require longer then the best case will be to refinance your hard money loan, you may be even able to obtain more financing and/or lower the rate. The worst-case scenario would be a default, which would result in a foreclosure on your property. This is something you want to avoid, as it would look unfavorably if you seek financing in the future from other lenders (both traditional and private hard money lenders).
When You Need More Money for the Rehab
If your rehab is way above budget, refinancing can help. Refinancing your hard money loan can allow your new money lender to use the additional equity in the property to give you the money to finish the renovation.
When Opportunity Comes Knocking
Refinancing your existing hard money loan can free up cash to invest in other opportunities. Perhaps you have finished your renovation, and you have a beautiful home on the market that has yet to be sold. Getting a short-term private loan may be a great way to get access to some of the equity in that home. This type of loan is called a hard money bridge loan.
When You Bought Property with Cash but Need Money for the Rehab
Perhaps you are an investor who bought a property in cash, or maybe you just inherited the property. You may still need cash to rehab the property. Getting a loan from a private lender by refinancing can help.
When You Want to Hold Your Property
If you are looking to increase your rental portfolio by holding the property you bought and renovated with a hard money loan, refinancing is the next step. You want a loan that has a longer-term and lower interest rate. This will allow you to have more rental income.
What About Traditional Lenders
A traditional lender, like a bank, may not even want to refinance your property, even if your property is leased, has a steady cash flow, and a good amount of equity. They are risk-averse and see your investment property as a risk. Not to mention the amount of paperwork that they require.
If they do decide to refinance your property, they are going to ask for stacks upon stacks of documents for you to get pre-approved. This can include bank statements and tax returns from years ago. It can take them anywhere from 60 to 90 ďays to close on the loan. This could mean that you pass your maturity date of the hard money loan. As a result, you risk beginning foreclosure proceedings on your current investment.
A traditional lender will require a long period of time before they will allow you to refinance. As an investor, that may not be appropriate for you because you need better terms so that you can continue to expand your portfolio by redirecting your capital.
How Do Traditional Lenders View A Newly Renovated Subject Property
If you refinance with a traditional lender, many times they do not use a new appraisal. They will not even look at the after repair value (ARV), which is an important part of attaining the right LTV.
Practical Tips You Can Follow
When getting ready to refinance a hard money loan, there are some practical tips you can follow. One is practicing time management. The other is taking care of your credit. Doing these things will put you on the right path for refinancing your hard money loan.
Practice Good Time Management
If you are nearing the end of your hard money loan, you want to make sure your property is turnkey and ready for tenants. Make sure you have time to shop around for the refinance plan for yourself and your portfolio. Waiting too long to take action or not being prepared for the end of your hard money loan may mean paying penalties or having to cover that balloon payment. Typically allow at least 3-4 weeks for closing. So you should begin your search for a new hard money lender to refinance your loan, at least 2 months before the maturity date.
Take Care of Your Credit and It Will Take Care of You
Being an investor means you may have high credit utilization. This is especially the case if you are growing your portfolio and your properties need to be renovated. Getting a loan with your LLC can help you build both personal and business credit history.
The Wrap Up
Refinancing a hard money loan can be a great choice for an investor. However, there are some things to consider such as the new amount, rate, and term that you will receive, and if you are better off paying the loan (if you are able to),. Another important factor is choosing the right lender for your needs when refinancing. Some specialize in certain regions or focus on certain properties. This is important to note, and the benefit of working with a real estate loan broker like GoKapital. Finally, it is important to follow the practical tips mentioned in this article as it may save you a lot of frustration in the future.
If you are on the market to refinance your loan call our office and a loan consultant will be glad to answer your questions and help you select the best available option.