9 Definitions and Terms to Unlock Private and Hard Money Loans

Hard money loans are a good option for investors who need quick access to capital and are willing to pay a higher interest rate. However, it is important to make sure that you can afford the monthly payments and that you have an exit strategy or plan to repay the loan in the agreed-upon time frame.

These terms can help you sort through all the private lending and hard money information:

1. Loan Term: The loan term is the length of time that you have to repay a loan.
3. After-Repair Value (ARV): The ARV is the estimated value of the property after it has been repaired or renovated.
5. Loan-to-Value Ratio (LTV): The LTV ratio is the percentage of the property's value that is being borrowed. For example, if a property is worth $100,000 and the loan amount is $50,000, the LTV ratio is 50%.
7. Loan-to-Cost Ratio (LTC): The LTC ratio is the percentage of the total cost of the property that is being borrowed. This includes the purchase price of the property and any renovation or construction costs.
9. Debt Service Coverage Ratio (DSCR): The DSCR is a financial ratio that lenders use to assess your ability to make your loan payments. It is calculated by dividing the property's net operating income (NOI) by the annual debt payments.
11. Points: Points are fees charged by the lender at closing, typically expressed as a percentage of the loan amount (ie “5 points” is a 5% fee).
13. Interest Rate: The interest rate is the cost of borrowing money from a lender, expressed as a percentage of the loan amount.
15. Prepayment Penalty: A prepayment penalty is a fee charged by a lender if you pay off the loan before the end of its term.
17. Balloon Payment: A balloon payment is a large, lump-sum payment that is due at the end of a loan term.