Why would you refinance a hard money loan?
A hard money loan can be really appealing for a number of reasons, many of those involving how simple they are to apply for and how quickly they can be funded. You're unlikely to find a traditional mortgage or even an alternative mortgage loan that can move at the speed of hard money loans. Some are even renewable, especially in the case of loans made for the purposes of new construction.
Since you often pay only the interest on the loan, and sometimes not even that (in which case, it'll be compounded into the loan), it may seem totally crazy to want to refinance one rather than find some other way to deal with the debt. But there are plenty of reasons to roll your hard money loan into a proper mortgage. As mentioned above, probably the most common reason to refinance a hard money loan is because you've decided to keep the financed property permanently.
Even if you can extend your hard money loan's term, you're looking at a huge amount of expense for the pleasure of paying interest-only payments. Since hard money loans are private mortgages that have very little regulation, you may expect to pay steep interest rates of up to 15% or even more, if the project seems pretty risky.
Moving your project or rental from a temporary hard money mortgage to a permanent type of financing is the smart financial move. By simply lowering the interest rate you're paying, you automatically increase your ROI -- and who doesn't like more cash flow?
Qualifying for a loan refinance
Refinancing a hard money loan is very similar to refinancing any other kind of mortgage. Unlike refinancing from some other types of mortgage instruments, you won't have an option to streamline your refinance, so you'll have to do the hard work of collecting documents, having appraisals, and waiting patiently for underwriting to do their job. There are a couple of important items to note, however, before attempting to refinance using a conventional mortgage product.
First, how are your credit score and debt-to-income ratio? If either is in the "needs help" category, you may stumble when trying to get your loan secured. Use the time you've got the hard money loan to correct errors on your credit report and bring your debt-to-income ratio down.
Secondly, make sure you really understand the terms of your hard money loan. If you're expected to pay a prepayment penalty, for example, this is very important to figure into the final numbers because you won't escape it with a refi.
If both you and the property in question are good candidates for a traditional mortgage, once your loan is considered to be seasoned, you should have a reasonably simple time refinancing the property's note. Hard money loans are just loans, after all, and can be paid off like other mortgages.
The Millionacres bottom line
Hard money loans can be a great way to get a jump on a building project or rental property acquisition, but they should never be taken out without an exit strategy in place. Whether that exit strategy is selling the property, as in the case of new construction or flips, or refinancing to keep the property as an income-producing property is totally up to you.
Because the interest and fees on a hard money loan can be substantial, it's important to use them strategically and no more than is strictly necessary if you're interested in maximizing your profits. If you can't qualify for a traditional mortgage to finance out of your hard money loan, check with alternative lenders, as they often have programs that can help you get into more permanent financing.