HOW WILL RISING FEDERAL INTEREST RATES IMPACT THE HARD MONEY MARKET?
One can never forecast with absolute accuracy the Fed’s next strategic move with our fiscal policy, but keeping a close eye on their public statements can provide clues that economists and financial analysts decrypt for the public. As of March, experts at Time Money have predicted a rate hike as early as June this year, following a statement by Janet Yellen and her colleagues at the Federal Reserve.
Effects on Conventional Lending
As the Fed seems poised to raise interest rates in the coming year, investors should be cognizant of how their mortgage rates and lending rates are going to be affected by federal fiscal policy. One key difference between conventional lending and hard money is that hard money lenders are not held to the standards set by Fannie Mae and Freddy Mac, the government-sponsored enterprises that are invested in mortgage-backed securities.
If you’ve taken out an adjustable-rate mortgage through a conventional lender, your mortgage rate is likely to see an uptick as rates rise. The advantage of adjustable rates is in their low-short term rates, but these loans are most vulnerable to the flux of fiscal policy. The Fed doesn’t control this rate directly per se- and rates might move up relatively slowly- but they are likely to rise. However, borrowers that took out a 15 or 30 year fixed-rate mortgage will stay locked at their current interest rate.
Effects on Hard Money
A key difference between conventional lenders and hard money lenders is that hard money is not directly affected by rising federal interest rates. Lenders are private entities who control their own rates and approval criteria. Hard money loans tend to be short term, and lenders can structure the loan, the exit strategy, and collateral release in a flexible way. Hard money lenders take a more comprehensive look at the borrower’s development goals and the potential of the project, then tailor a payment plan that is mutually beneficial to the borrower and the lender. This differs from the one-size-fits-all approach with conventional lending, and affords borrowers a greater degree of freedom from the effects of federal fiscal policy.
Choosing your Lender
Ultimately, hard money loans and bank loans are two separate services that meet different needs in the lending market. Individuals looking to finance their primary residence or take out a 30-year fixed rate mortgage are likely to continue working with conventional lenders, because it offers lower long-term rates than hard money loans.
On the other hand, hard money will maintain its position as the best financing option for short-term investment, residential rehab, and construction for resale. Real estate developers choose hard money for its results-oriented structure that helps them bypass the logistical difficulties of conventional lending, whether it’s long approval times, fluctuating rates, or inflexible loan structures. The initial rates tend to be higher than a bank loan, but it sets your project in motion. As conventional lenders raise their rates, hard money loans will continue to be an invaluable resource to fix-and-flip developers to catalyze construction and fund the initial renovations on their project prior to resale.
Socotra Capital is California and Nevada’s premier hard money lender for your real estate investment needs.
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