Understanding Hard Money Loan Fees and Costs to Close

Understanding Hard Money Loans

When securing a hard money loan, it’s essential to understand the cash you’ll need on hand to close the deal.

Below, we’ve outlined some sample fees and costs to help you plan your financing efficiently and ensure a smooth closing process.

Breakdown of Fees and Cash Required to Close

  1. Legal Fee: $795
    • This covers the preparation and review of the loan documents by our legal team.
  2. Appraisal Cost
    • An appraisal is necessary to determine the current value of the property and its after-repair value (ARV). The cost of the appraisal varies depending on property size and location but typically ranges between $350 and $750.
  3. Purchase Cost
    • While we might fund up to 70% of both the purchase price and renovation costs, the investor must cover the remaining portion of the purchase cost. For example:
      • If the purchase price is $60,000 and the renovation budget is $40,000, we would fund 70% of the total ($70,000).
      • This means 50% of the purchase cost ($30,000) needs to be covered by the investor upfront.
  4. Other Closing Costs(not ours)
    • These additional costs include but are not limited to:
      • Title insurance
      • Escrow fees
      • Recording fees
      • Any prorated property taxes or HOA dues
    • Closing costs generally total 2-5% of the purchase price, depending on your location and transaction specifics.
  5. Value of First Draw
    • For renovation projects, it’s important to note that we reimburse renovation costs only after the work for that segment is completed and verified. This means you’ll need cash on hand to cover the first draw, which typically represents 25% or more of the total construction budget.
    • We offer four free draws throughout the renovation process, which are distributed as work on each segment is completed.
  6. Cash to Cover Interest Payments
    • Hard money loans require monthly interest-only payments. You’ll need to have sufficient funds to cover these payments for the loan term.
    • Interest rates can be as high as 12% annually. For example, on a $100,000 loan at a 12% annual interest rate, your monthly interest payment would be approximately $1,000. If your project spans 6 months, expect to allocate $6,000 for interest payments.

Total Estimated Cash on Hand

To summarize, here’s what you should budget for closing:

  1. Legal fee: $795
  2. Appraisal cost: $350 – $750
  3. Purchase cost: 50% of the purchase price (depending on loan structure)
  4. Other closing costs: 2-5% of purchase price
  5. First draw for subcontractors/materials: 25%+ of construction budget
  6. Interest payments: Varies based on loan amount, interest rate (up to 12%), and loan term

For a property purchase of $60,000 with $40,000 in renovations at a 70% LTV, an example cash breakdown might look like this:

  • Legal Fee: $795
  • Appraisal: $500
  • Purchase Cost (50% of $60,000): $30,000
  • Other Closing Costs (3%): $1,800
  • First Draw (25% of $40,000): $10,000
  • Interest Payments (6 months on $70,000 at 12%): $4,200

Estimated Total Cash on Hand: $47,295

Conclusion

Understanding these costs upfront helps ensure you’re well-prepared to close your hard money loan. Having cash available for fees, first draws, and interest payments will keep your project on track and prevent unnecessary delays. If you have any questions or need a more detailed estimate based on your specific project, our team is here to assist you.