Tips to Calculate a Hard Money Interest-Only Loan
As a money lender, I’m often asked about our interest-only loans, how they work, and the cost of taking out the loan. Here’s some information about interest-only loans and how you can calculate the payments.
Let’s start with the basics. Hard money lenders require interest payments on the loan’s principal balance just like any other financial institution. Interest is the monetary charge for the use of borrowed money and is usually expressed as an annual percentage rate (APR). DFW Hard Money’s loans are considered to be “interest-only” loans. This means the only payment due monthly is the interest on the loan for the previous month. At the end of the loan term, the entire principal amount will be due and payable.
How to Calculate Cost of a Hard Money Interest-Only Loan
If a hard money lender uses the simple interest method, here’s how you can calculate the amount of interest you will have to pay on an interest-only loan and what your monthly cost will be.
- the total principal amount of the loan
- the interest rate you’re being charged
- and the length of the loan in years.
Let’s say you take out a five-year loan for $100,000, and your lender gives you an annual percentage rate (APR) of 10%.
The first formula is as follows:
- Principal Loan Amount x Interest Rate x Time (# of years) = Total Interest Dollars You’ll Pay For Loan
- $100,000 x .10 x 5 = $50,000 total interest will be paid for the loan.
To find out how much you will have to pay each month, take the interest dollars from the formula above and divide it by the number of months you’ll have the loan. Note, to get the length of your loan in months, multiply the number of years you’ll have the loan x 12 months.
The second formula is:
- Total Interest $’s / # of months you’ll have the loan = Your Monthly Payment
- $50,000 / 60 months = $833.33
So, in this example, you would pay $833.33 every month for five years until the principal balance is paid in full.
Benefit of Interest-Only Loans
Keeping in mind the saying a dollar today is more than a dollar tomorrow, here are some facts about interest-only mortgage loans that are interesting to consider.
Interest on virtually all mortgages is paid in arrears. This means that the payment you make each month pays the interest due for the previous month. The benefit is that you have use of the funds for a month before you have a payment due.
Most lenders will prorate interest at closing, so the payment is due on the first of the month, the following month. If you close on January 30th, the lender will prorate two days of interest, and your first interest payment would not be until March 1st. Rent is paid in advance, and interest is paid in arrears. So, with interest, you hold onto your money longer, which gives you more time to invest it elsewhere and earn off of it.
Know All of Your Costs
Many lenders charge a prepayment penalty if a loan is paid up before the term of the loan ends or at another specified time. With DFW Hard Money, we do not charge prepayment penalties no matter how quickly a loan is paid in full. This is a significant advantage to the person taking out the loan. We require the monthly interest payment due to be drafted from your account on the 1st of every month, and our interest rates can vary up to 13%. Check out our 5 Step Money Process that outlines the steps from application to loan payoff.
Get Expert Help
Once you know the actual cost of your loan, you can make smart decisions. DFW Hard Money is a true private money lender providing honest and simple loans for real estate investing. We specialize in 24-48-hour funding with competitive terms, no appraisal, and no predetermined down payment required.
Whether you want to fix and flip, or need funds for commercial, transactional funding, developments, or you’re a first time or experienced investor, we’re here to help. Contact us with questions or for a free consultation call (817)200-7575.