Construction Loan Rates Explained

Unlike conventional construction loans, hard money construction loan rates are based more on the property’s value and potential growth than the borrower’s financial status. Instead of credit history and income, lenders look at the property’s equity, the nature of the project, and how much value it will add to the home once it’s finished. Because of this, hard money construction loan rates are higher to compensate for the added risk.

Hard money construction loan rates are typically two to three times higher or four to five points more than those of traditional loans. Lenders use different formulae to determine hard money construction loan rates, but the range is generally between 12% and 18%. In addition, the origination and closing fees can total around 10% of the loan amount.

Some lenders will finance the 100% of the construction cost so that the borrower does not have to make a down payment, although this will depend on the nature of the project. In most cases, the funds will be placed in a reserve account and released in stages according to the progress of the project. The duration is typically one year, although lenders can spread it out over a longer period for large commercial projects.

Finding the Best Construction Loan Rates

Like other collateral-based loans, private construction loan rates are affected in large part by the property itself. To get the best construction loan rates, it’s more important to focus on improving the property rather than presenting a good credit record. Primarily, lenders will want to know how much equity there is in the home, how much it is currently worth, and how much it will be worth once the construction is finished.

Have a detailed plan of your project before making your construction loan application. This will allow the lender to better assess the potential profit and risk involved, and thus give you more realistic construction loan rates. Highlight the goals and benefits of the project and back it up with up-to-date figures whenever you can. At the very least, this can help the loan move along faster.

You can also hire a broker to help you find the best construction loan rates. Brokers work with a large number of lenders and can easily tell you where you can get the best deals for the kind of loan you need. They can also help you complete your application, prepare for the project, and compare various construction loan rates and terms.