Really unclear on the nuances of refinancing - can someone walk me through?

Question

Hi - first time investor, naturally. I have a property that I want to refinance from a hard money loan to a longer loan. Here's my questions:

- why is it that the hard money loan, on which I paid interest-only, is now higher than when I got it? I've been paying the interest, so...?

- the loan company sent a term sheet to me based on my appraisal guesstimate. This makes no sense. I am not a professional appraiser, of course I think it's worth more. They assured me this is standard practice 'to get the ball rolling' before they sent an appraiser. Is this how it's done?

- they also wanted my credit score, so that I could give a personal guarantee on the business loan. Again, they claim this is standard practice. Is it?

Actually, I could use someone to do a line item explanation of what they sent. Anyone available?

Thanks!

Andrew Postell · Answer

@Susan Moscaritolo congratulations on this being your first post. I am glad you had the courage to ask questions. This sounds like it might be your first deal? No problem if it is. On my first deal I didn't even know what questions to ask! So at least you are looking at your deal critically. Now, some of this is normal but we are all having to guess here. I'll take my guesses here in a second. But I would highly encourage you to read this post HERE on how to find real estate investor friendly lenders. Admidetly, that post is about finding your REFINANCE step lender but the concepts work the same for the BUY lender too - and that is lean on other real estate investors in your area. And that goes for ANY piece of real estate investing whether it's the plumber or the lender. If another real estate investor has already done all the hard work in identifying a good vendor, then let's take their recommendation. And then I can maybe go back to that investor and ask them about this stuff too. I mean, how do we know if anybody is any good really? We usually don't until AFTER it's too late. So leaning on other investors may not be fool proof but it will limit our exposure to things if he/she has already worked with them before. Now, here's my "guesses" on what you might be looking at: 1. Hard Money Loan (HML) balance is higher - this might be for several reasons. Maybe you had "points" on your loan. Some HML will charge points at the beginning and some at the end and some will split the points - 1/2 when you buy and 1/2 when you close. This might also be with some "daily interest" being included in the payoff. And it might be some little charges that lenders will usually put in there - those "payoff" charges are usually nominal though (less than $100). So I might lean on the previous two more than the later one. The only way for us to know for sure is to ask the lender. They should be knowledgeable enough to explain why. If not...look for a different lender. 2. Value - yes, you are not an appraiser but every lender has to base the initial loan off of something. How else could anyone tell you what your fees would be without SOME estimation of the value. Once the appraisal comes back, then the loan/fees will adjust to a much more accurate portrayal. Keep in mind though that we do want you to be able to estimate your ARV without help eventually. This will be a needed skillset for you if you want to continue in real estate investing. 3. Credit Score - it is usual for most HML to ask for your credit. It's not always needed though. Not every company will ask for it especially if you have tons of experience. This one is certainly company specific and might be experience driven. I would not let this determine your desirability of working with this lender. It's common enough to not be a big deal. And if you want to take a screenshot of your payoff just attach it to this post. Tag us in it and we'll review it for you. Hope all of this makes sense. Thanks!

David Park · Answer

Hi Susan, Not sure why the balance would be higher if interest only - It's either due to closing costs being added to the loan, or perhaps The PAYOFF is higher due to unpaid interest, but not the balance... Definitely standard to ask for credit pull, or score. And like previous commenters said, they're likely estimating conservatively the value, before actually doing a full appraisal.

John Chong · Answer

-Did you have any loan extensions? Depending on the lender they might have extra fees for extensions. -It sounds like they're just estimating your value and using the actuals when the appraisal comes in. Sounds standard if they require an appraisal. More than likely your values will change after the appraisal. Some lenders don't require an appraisal but instead do a full desktop analysis running comps based on MLS data. The values on those term sheets won't change and it should be a quick close. -A credit authorization is normal for most lenders. Some have FICO minimums. -Sure, I can take a look at it for you

Justin Hammerle · Answer

- why is it that the hard money loan, on which I paid interest-only, is now higher than when I got it? I've been paying the interest, so...? Is there a construction component that you are drawing from? Some private loans will have increased rates built in at certain maturity dates as well. - the loan company sent a term sheet to me based on my appraisal guesstimate. This makes no sense. I am not a professional appraiser, of course I think it's worth more. They assured me this is standard practice 'to get the ball rolling' before they sent an appraiser. Is this how it's done? I think you'll find that private lenders all have different processes; not universal process like conventional banks, the one I was working with didn't even require an appraisal. - they also wanted my credit score, so that I could give a personal guarantee on the business loan. Again, they claim this is standard practice. Is it? Are they running your credit or just want to review your FICO score? Yes - personal guarantees are common with private lenders.