Private Money: Making Extra Payments?

[Bill Mitchell]

With private money for say a rental property, are you generally able to make extra payments on the debt every month to pay off the loan faster? On the same note, could you get a 15 year private money loan on a rental, and then decide to completely pay it off 5 years in?

Or are there generally stipulations and such that prevent you from doing so between you and the individual(s) loaning you the money. This is strictly regarding private money, not hard money loans.

Thanks guys

[Philip Cutting]

Hi Bill,

Yes, maybe, and no by default.

Yes because the lender had planned to make care free income for 15 years, and now you are making them work by having to get that money back into play again (thus it's your job to send them another investment opportunity along with the check, and to give them a heads up). If there was no "official" prepayment penalty, consider giving them a gift for having to go through the effort of re-lending you the funds for your next investment.

Maybe because it depends on the terms of the loan that you set-up before hand. It may or may not have prepayment penalties. When you do a private loan, you make a promissory note and it should outline the details (rules) of the loan. Because it is private there is a lot of lead way. Also there are a lot of restrictions (regulations) on lending and borrowing private money, but that's a different subject.

By default, there is no prepayment penalty for private money loans.

When I borrow private loans, I don't have the lender put in a prepayment penalty. One reason being that they may ask me to get the money out early or that I may want to pay the loan off early. So what I do to be fair is to give at least 3 months of interest even if I somehow flip or refi the house right away. Lenders deserve to make money on their effort and have a plan when they lend it so it's good to respect that. Then your job is to get it back into play right away. I also send my lenders cards (thank you notes) and small gifts to let them know I appreciate it and to show respect.

In the end, if there is no prepayment penalty written into the loan, then you do not HAVE to pay anything more and everyone did their job once you paid what you promised too.

By the way, 15 yr notes are hard to find, they happen, I have some, but they are rare. It's normal to have 3 to 7 year notes. Even some as short as 6 to 18 months. There are no rules on how long they must be, so you have have loans that are just for a few hours, like transactional lending...

I'll try to add more detail about this later, but I have to run for now.

Phil Cutting