Interest rates on mortgages have recently dropped to near-historic lows. However, lending conditions have become much more stringent. As a result, many people looking to buy a home will be unable to obtain a typical mortgage from a traditional lender. However, there is another option: private money, commonly referred to as a private mortgage or “hard money.” But, before you go the private money route, make sure you understand what you’re getting yourself into. Here are the advantages and disadvantages of using private funds to buy a home in Denton Texas.
Pros of Using Private Money to Buy a House
There are indeed some definite benefits to using private money to buy a house in Denton Texas. The main pros are . . .
“Private money loans can be a fantastic choice for homebuyers who are unable to qualify for a traditional mortgage due to less-than-perfect credit [or] debt, or for self-employed persons who cannot always offer proof of a consistent income,” according to the article. Because private money loans are less “person-focused” and more “property-focused,” they are easier to qualify for. As a result, “a person with bad credit can [often] secure a hard money loan if the idea has a good chance of succeeding.”
GOOD DEAL FOR FLIPPERS
Despite the fact that private money often has a short repayment time, it’s still a suitable alternative for individuals looking to buy a house in Denton Texas with the intention of flipping it, especially if they aim to sell as soon as possible after refurbishing it. “If you plan to do major repairs in a short amount of time that will increase the value of the home, you may be able to sell or refinance the property quite fast,” which makes using private money a viable choice.
The normal quick approval process and period is a clear advantage of private money. The approval process for a private money loan can take as little as a few weeks, “as opposed to 30 to 45 days for a traditional loan.”
NO PENALTY FOR PREPAYMENT
If you buy a house in [market city] with a traditional mortgage loan, you’ll almost always have to pay a prepayment penalty if you pay it off early. When it comes to private money, though, this isn’t always the case.
So, if you’re an investor, particularly a flipper, and you finish the renovations early, you won’t have to pay a prepayment penalty if you sell/flip the house before the standard private money loan period. This event occurs frequently enough that it is a significant benefit.
Cons of Using Private Money to Buy a House
If you intend to buy a house in Denton Texas with private money, you also need to be aware of the cons . . .
SHORT REPAYMENT PERIOD
Conventional loans, as you surely know, have a 15 or 30-year payback period. A private money loan, on the other hand, normally has a 12-month payback period, however it can be as short as six months and as long as two years. “Private lenders are typically aiming for a quick return on their investment, and they aren’t geared up to service a loan for several years like a traditional mortgage firm.”
HIGHER INTEREST RATES
“Private money lending has substantially higher interest rates than regular loans… In reality, mortgage rates are frequently more than double the average 30-year mortgage rate, ranging from 12 to 20% every year.” The reason for this is that private money does not need you to have perfect credit like traditional loans do. By securing the loan with the property in question and charging higher interest rates, private lenders reduce their risk.
HIGHER DOWN PAYMENT
If you buy a house in Denton Texas with private money, you’ll almost certainly need a 20% down payment, and you’ll pay a higher interest rate for the same reasons. Many conventional loans require less than 20% down payment (but private mortgage insurance must be paid), making them a preferable alternative for many buyers.
Assume you’re an investor/flipper who bought a house to remodel and resell using private money with a 12-month payback term. You won’t have any concerns if everything goes off without a hitch – but that rarely occurs. Delays and issues are common, and you’ll need an extension if this happens. Extension costs and additional monthly interest payments will occur with the extension.
Consult Your Denton Texas Agent
Private money is, in the end, a feasible choice for some. In some circumstances, the trade-off between speedy approval and higher interest rates is worthwhile. However, you must conduct study to ensure that the trade-off is appropriate for you. And that’s when your local Denton Texas agent comes in handy. Contact us at [phone] to learn more about the advantages and disadvantages of utilising private money to buy a home in Denton Texas.