How Much Does Your Interest Cost You?

When considering rehab financing, there are many variables you need to take into consideration. We all tend to get caught up in points and terms, and seem to disregard other pertinent information. One of the most important aspects of a real estate loan is the interest rate.  Specifically, on a loan based on draws (rehab loan); the interest rate can make or break you. Some hard money will charge you interest on the entire loan amount, while others only charge you for what you use. Let’s see how the two compare to each other with an example of a loan for a property with a purchase price of $70,000, rehab costs of $30,000, and a completed project in 9 months.

Option A – Interest paid on full loan amount or commitment at 9.5% (Some Hard Money Lenders)

  • Obtain a $100,000 loan and purchase the property with $70,000
  • Since it will take 9 months to complete the loan, you will be paying 9.5% on $100,000 for 9 months
  • If you take no draws for 2 months and only used $70,000, you are paying interest on the full $100,000
  • For those two months, you would be paying $792 a month in interest, and over the 9 months, you will pay approximately $7,128 in interest
  • Your total payment for a bank loan of $100,000 would be $7,125

 

Option B – Interest paid on outstanding amount at 9.5% (Specialty Lenders like ReCasa Financial Group)

ReCasa Financial Group

  • Interest is only paid on what you use, so starting out, you would pay $554 a month on $70,000
  • If you make a $10,000 draw to use towards rehabbing the property, you would pay interest on $80,000, which would be $633 a month
  • Then if you draw $5,000, your payment would be $673 a month
    • (($85,000 x 9.5%)/12) x the number of months
  • Then when you draw the remaining $15,000, your payment for the remaining months would be $791 a month
  • If you were to make the $10,000 draw in month 3, the $5,000 in month 5, and the $15,000 in month 7, your total would be $6,093 in interest

Let’s see if there is a cost difference between the ways interest is charged:

  • Option A is $791 a month for 9 months, totaling $7,125 in interest and a repayment of $107,125
  • Option B (as calculated above) is $6,093 in interest and a total repayment of $106,093
    • $554 x 2 + $633 x 2 + $673 x 2 + $791 x 3 = $6,093
    • Note that with a ReCasa Financial Group rehab loan, there is no prepayment penalty and interest is only derived from the funds you use, not the outstanding balance
      • Since there is no prepayment penalty, if you pay the balance off before the 9 month term, such as in 5 months, your repayment will be substantially less
      • (($100,000 x 9.5%)/12) x 5 = $3,958 in interest, or $103,958 total repayment as compared to $107,125 with option A

Just by using a different real estate lender at the same interest rate, you saved $1,032 in interest charges. Keep in mind that this was for a $100,000 loan at a 9 month term, thus your savings could potentially be greater for a larger loan amount. Note that these calculations will vary by draw schedule and loan amounts.

Now you can see that points and terms are not the only thing you should be concerned about. How your interest is calculated can maximize profits!