HML Example

[Jarred S.]

I am having trouble understanding a hard money lending example. Everyone I have talked to has recommended it and I have never used this before.

Can someone help explain the basics of how to get to a monthly payment for the following circumstances:

APR Value $115,000
MAX LOAN: 65%
RATE: 15% + 1 POINT
MINIMUM TERM: 6 MONTHS
MAXIMUM TERM: 12 MONTHS
LOAN TYPE: INTEREST ONLY

Any feedback would be greatly appreciated.

Thanks,
Jarred

[Jarred S.]

**$115,000 ARV

[Jon Klaus]

If they are going to loan 65% of $115k, then the loan amount will be $74,750. At 15% interest only, the monthly payments will be $934.38, plus the one time $747.50 origination fee. Then at loan repayment time, pay back principal of $74,750.

[Bill Gulley]

Loan amount times the interest rate divided by 360 times 30 will give you an interest only payment amount.

[Justin S.]

Any HML with a minimum time period is not a good loan for you. I would look for someone else or negotiate it out. Other than that it would be competitive in my market. I'm also assuming you are flipping the property.

[Ann Bellamy]

Jarred S., hard money loans are simple interest. So you take the outstanding principal balance X 15% to get your annual interest. Then divide by 12 to get your monthly payment. (or divide by 360 days (# days in a lending year) X 30 (30 days in a month), as Bill Gulley said.

To get your total loan amount take your ARV X 65% if that's what your HML told you, and that is your total loan amount, as Jon K. said.

If you are getting part of it at purchase, and part in construction draws, the outstanding principal balance is the amount disbursed at purchase, plus the amount of any construction draws taken. that's why Bill Gulley gave you the 360 day formula, because the daily interest changes when a draw is disbursed.

So 115,000 X .65 = 74,750 principal balance if all disbursed at close
74,750 X .15 = 11,212.50 annual interest
11,212.50 / 12 = 934.38 as Jon said

The calculation is a little more involved if you are taking construction draws, but payment should always be less than the $934.38 until all draw funds are disbursed.

15% plus 1 point isn't bad, but all hard money rates are local, unless you are using a national company. The reason you have a 6 mo minimum is because they are only charging 1 point. If you pay more points you can probably get rid of the minimum.

[Jarred S.]

Awesome. Thank you all for the advice. I am in the process of setting everything up and need to get my financing in order to show proof of funds. I was just interested in learning more about hard money. I've read so much but you all made the calculations easily understood. Thanks again. How many of you have used or will use hard money in the future?

[Jarred S.]

Justin S. yes Justin I am looking to rehab. I am assuming the way to save the most money is to take more points and get rid of the minimum all while flipping the property quickly.

Do you have any specific strategies that tie in to this?

[Justin S.]

Jarred-

You need to think of points as interest rates as well. Look at the two examples below. Lets assume you plan to turn your money over 4 times by completing 4 flips

Example 1:

You flip 4 houses and borrow 100,000 each time, and payoff the loan on each one after 3 months. Your interest rate is 18% on each house.

Flip 1 - You pay $1,500/month for total a of $4500
Flip 2 - You pay $1,500/month for total a of $4500
Flip 3 - You pay $1,500/month for total a of $4500
Flip 4 - You pay $1,500/month for total a of $4500

Total interest paid is $18,000.

Example 2

You flip 4 houses and borrow 100,000 each time, and payoff the loan on each one after 3 months. Your interest rate is 12% on each house, plus 3 points.

Flip 1 - You pay $1,000/month for total of $3000. Plus you pay $3000 in points.
Flip 2 - You pay $1,000/month for total of $3000. Plus you pay $3000 in points.
Flip 3 - You pay $1,000/month for total of $3000. Plus you pay $3000 in points.
Flip 4 - You pay $1,000/month for total of $3000. Plus you pay $3000 in points.

Total interest paid is $12,000. Total amount paid in points is $12,000. Total loan costs $24,000. You are paying an equivalent of 24%!

Always look at the interest rate and the points. One loan may seem cheaper, but if you turn your money over, then it could be more costly.

[Bill Gulley]

I suggest you use the APR to compare loans. With your financial calculator

enter the time period (n)
enter the note rate (i)
enter the loan amount (pv)
set the calculator and solve for the future value (fv)
add the points and loan fees and subtract that amount from the loan amount and enter that amount as the loan amount again as (pv)

now compute to solve for (i) interest, which will be the APR for the loan....

[Kurt Moeller]

@Justin S. Referring to the 2nd example above of 12% plus 3pts on a $100,000 loan paid off in 3 months. Questions:

1) Does this assume that the points are actually paid up front (i.e. borrow receives $100k, pays lender $3k, walks away with $97k)?

2) Does the borrow then pays interest of $1000/mo to lender while still holding the house?

3) Would your example change if the points and interest are rolled into the loan and all paid in full at the end?

[Kurt Moeller]

So for this example if of $100k needed, at 3points and 12%. But the borrower needs to pay off both points and interest at the end, the total must compound. Would this be accurate:

Start) Beginning $100k needed, points rolled to total owed, so loan start total owed back to lender is $103,092.78 (100k/97%) and borrower received $100k.

1) After Month 1 - Interest after month one is $103,092.78 times 1% is $1,030.93, added to start total total leaves $104,123.71 total owed.

2) After Month 2 - Interest after month one is $104,123.71 times 1% is $1,041.24, added to Month 1 end total leaves $105,164.95 total owed.

3) After Month 3 - Interest after month one is $105,164.95 times 1% is $1,051.65, added to Month 2 end total leaves $106,216.60 total owed.

End) Borrower sells house and pays back lender $106,216.60 total.

Is this accurate for a HML situation?