Rising mortgage interest rates have made headlines for months, as more and more borrowers are being “priced out” of the housing market.
Purchasing a property is becoming out of reach for many investors, consumers, and business owners, as bank lenders tighten their requirements to avoid risky borrowing situations.
Meanwhile, there’s an alternative lending opportunity that’s unaffected by these typical market factors: hard money lending.
Let’s dig into what happens when interest rates rise, how they affect you, and how hard money lenders can offer a more flexible solution for borrowers who are running out of options.
What happens when interest rates rise?
Mortgage interest rates have been on the rise all year following record lows in 2021. The current rates are largely being driven by high inflation — which is a result of last year’s low rates.
The Federal Reserve has increased the federal funds rate significantly this year in efforts to cool rising inflation.
While the fed funds rate influences short-term rates on credit cards and consumer loans, such as personal loans, it’s often mistakenly attributed to directly influencing mortgage rates.
However, the funds rate does not directly influence mortgage rates. Instead, it’s more of an indirect relationship.
Mortgage rates more closely follow 10-year Treasury yields, and these Treasury yields are affected by the funds rate. As a result, fixed mortgage rates may fluctuate loosely based on the funds rate.
Sometimes, in anticipation of Fed moves, mortgage lenders also will adjust their rates up or down to reflect these changes.
How do interest rates affect you?
When interest rates rise, long-term affordability becomes increasingly difficult for potential buyers.
When we say more borrowers are being priced out of the market, we mean that as interest rates rise, these borrowers suddenly cannot afford a home they may have previously been able to afford.
What’s your loan scenario?
This is particularly evident for those who want a 30-year fixed-rate mortgage. The long-term interest costs of this type of loan will stack up, making affordability difficult.
A lower interest rate can potentially save the borrower thousands of dollars over the life of the loan.
Many market experts are continually reminding borrowers that while interest rates are rising, they still remain historically low. However, this is beside the point when it comes to traditional lending.
As interest rates rise and affordability becomes increasingly difficult, bank lenders are tightening their requirements in efforts to protect themselves from riskier investments.
This tightening often unnecessarily locks qualifying borrowers out of the market, because the requirements are based only on certain factors such as credit score, income, or employment history.
Hard money lenders approach this process differently.
How do rising interest rates affect hard money lenders?
When it comes to rising interest rates, hard money lenders remain largely unaffected.
A hard money loan is funded by private lenders or funding groups instead of banks. These lenders aren’t held to the same standards as bank lenders, and they’re not directly affected by rising interest rates.
Hard money lenders control their own rates and lending criteria. A hard money loan is excellent for short-term projects such as real estate investments, house flipping, or renovations because it provides quick access to large amounts of cash.
Hard money loans are also perfect for bridging the gap between the sale and purchase of a property with a bridge loan, or providing immediate cash flow for business expenses or other large purchases.
Lenders have the freedom to structure the loan and exit strategy with much greater flexibility.
Instead of ticking off strict requirements, they can look at the bigger picture: What is the project’s potential? Does the deal make sense? Does it benefit both the lender and borrower?
A conventional lending approach doesn’t allow for this degree of flexibility. If you don’t meet the basic requirements, you simply can’t move forward.
Is hard money lending a good idea?
Hard money loans generally have higher interest rates than bank loans, but in exchange for a higher rate, you get greater flexibility and funding in days.
Additionally, hard money loans are meant for short-term projects. Shorter terms make higher interest rates more bearable, because it’s not meant to extend over several years.
A hard money lender is more focused on your collateral, your business plan, and the overall merits of the deal rather than your credit score, income, debt, or employment history.
These loans are more customizable, with instant approvals and fast closing times.
Real estate investors, business owners, and homebuyers who need more flexibility all can benefit from hard money lending.
Hard money loans are particularly helpful in time-sensitive scenarios, where you need funds fast in order to beat out the competition, capture a great deal, or make a quick move.
How to find a hard money lender
Not all hard money lenders are the same. Since each lender has the freedom to set their own standards, hard money loan requirements can vary.
When it comes to hard money, you’ll want to find a lender that’s just as interested in building a relationship with you as they are in funding your deal.
A hard money lender can be a true lending partner, and can be there to support you in many mutually beneficial deals to come.
Marquee Funding Group is the ethical standard in hard money lending. We fill the gaps in the industry left behind by banks and other traditional lenders.
We offer the following benefits and loan options to our borrowers:
- Same-day approvals
- Closing in as fast as seven days
- Loan amounts from $50,000 to $20 million
- Loan-to-value up to 70%, deal-specific
- Purchase money loans
- Rate-and-term refinance and cash-out refinance
- Owner-occupied and non-owner-occupied consumer or business purpose loans
- Single family, multi-family, commercial, industrial, and land loans
- Construction loans, including ground-up, fix-and-flip, fix-and-occupy, and value-add
If you want to learn more about the hard money lending process or ask questions about your unique lending scenario, reach out to our experienced hard money lending experts, or submit your loan scenario today for quick review.
We look forward to helping you move along your investment deals, business opportunities, or homeownership goals.