Hard money loans explained

Hard money is short-term real estate financing based on the property's value rather than your income and credit — funded by private lenders and funds instead of banks. It's the workhorse behind most flips and many BRRRR deals, because it does two things conventional loans can't: it closes in days instead of weeks, and it lends on the deal (including rehab money) rather than on your tax returns. You pay dearly for both. Understanding exactly what you're buying keeps hard money a tool instead of a trap.

How the terms actually work

• Rate: commonly 10-13% interest, sometimes higher — far above conventional, because the loan is short-term and higher-risk.
• Points: an upfront fee of 1-4% of the loan amount, paid at closing. Two points on a $200,000 loan is $4,000 before you've done anything.
• Term: short by design — 6 to 18 months. Hard money is a bridge, not a home for a 30-year hold.
• Loan-to-value / loan-to-cost: lenders typically fund up to ~70% of after-repair value, or a percentage of purchase plus rehab, leaving you to bring the gap.
• Interest-only payments: most hard-money loans require monthly interest only, with the full principal (a 'balloon') due at the end when you sell or refinance.

When hard money is the right tool

• Flips: the project is short, needs rehab funds, and must close fast to win distressed deals — exactly what hard money is built for.
• BRRRR deals: buy and renovate with hard money, then refinance into a conventional or DSCR loan once the property is stabilized and seasoned.
• Speed-critical purchases: an auction, a motivated seller, or a competitive off-market deal where a 30-day bank close would lose the property.
• Borrowers who can't get conventional financing quickly: self-employed buyers, investors past loan limits, or deals on properties too distressed for a bank to touch.

Hard money vs. conventional, at a glance

Vetting a hard-money lender

1. Compare all-in cost, not just rate: add points and fees to interest to get the true price of the money for your expected timeline.
2. Understand the draw schedule: rehab funds are usually released in stages as work is completed and inspected, so you must front early work yourself.
3. Read the default and extension terms: what happens if you need another month? Extension fees and default rates can be brutal — know them before you sign.
4. Check their reputation and speed: a lender who can't actually close in the promised window defeats the entire purpose. Ask other local investors.
5. Confirm prepayment terms: some hard-money loans have minimum interest guarantees, so paying off early doesn't save as much as you'd expect.

The bottom line

Hard money buys you speed and flexibility that banks can't match, funded on the strength of the deal instead of your paycheck — and you pay for it with double-digit rates, upfront points, and a short fuse. It's the right tool for flips and rehab-then-refinance strategies with a clear, financed exit, and the wrong tool for anything you intend to hold long-term or any deal where the exit is a hope rather than a plan. Price the money over your realistic timeline (not your optimistic one), keep the project on schedule, and always know exactly how the loan gets paid off before you take a dollar of it.