The costs are not really hidden per se, but may not be as obvious to a borrower obtaining a private, or hard money loan as they are sometimes referred to, for the first time.
We will use the term “costs” loosely to refer to any cash that is paid by you as the borrower. A private money loan will generally have three types of costs:
Private Money Loans- Up Front Costs
These will be costs to originate the loan. The costs will cover a variety of items paid by your private money lender, including:
Points— Essentially compensation to the private money lender for originating the loan.
Referral Fee – Sometimes covered within the points, but used to compensate others who may have referred you to the lender.
Underwriting, Processing, Document Preparation or Other Fees – Paid to the private investors, the lender who originates the private money loans, or to outside third parties to create the loan. In private money transactions, the loan documents are more unique that in a bank transaction which is why you should expect these costs to be a bit higher than traditional bank loan costs.
Throughout the loan, you will have costs such as:
Interest – Paid to the private investor on the loan at a prescribed rate for the use of the money.
Amortization – The repayment schedule of principal over the term of private money loans, if any.
Late Fees – Penalty incurred if there is a late payment.
Taxes and Insurance – Sometimes paid into an impound account, sometimes paid by you directly.
Advances – When private money loans are delinquent, the lender may advance against the loan for appraisals, unpaid taxes, foreclosure fees or legal fees.
Renewals for Private Money Loans
If the loan matures, or balloons, and you cannot pay the loan off, your investor may allow you to renew the loan. The renewal will typically require additional up front points, and closing costs to generate the loan renewal documents.
You can get in touch with lenders who fund private money loans others will not, by reviewing our free directory.