Navigating Your Loan Term: How to Make a Plan That’s Right For You
Navigating Your Loan Term
When you’re looking into hard money loans, one thing to consider is the loan term length. Here’s what to expect, and how to create the right loan payback plan.
After countless hours looking for the perfect fixer-upper to flip, you’ve finally found it. Now, how do you find the money to fund your investment?
While some house flippers buy homes with cash, most will still need a loan to complete renovations. When you’re just getting started flipping houses, choosing the right financing option can be tricky.
A rehab loan can give you the capital you need to get started. With the right loan term, you can ensure that your flip is profitable, even despite interest, prepayment fees, or a slow housing market.
Choosing the Right Loan for Your Repayment Needs
Finding a loan depends on a variety of factors, like your credit score, down payment, cash reserves, and your history of flipping houses. You will also want to factor in the 70% rule of house flipping to ensure you are likely to turn a profit. The purchase price and after repair value (ARV) can help you determine how much money you need and what loan option is best for you.
In some cases, like foreclosure, you may not have a clear view of the necessary repairs before you buy the property. It’s essential to know about your financing options to be sure you have enough money for unexpected costs.
There are five primary types of home loans for fixer-uppers. To determine which loan is best for you, it’s also important to know how their repayment schedules and loan terms differ. A long term loan is excellent for someone thinking about using their renovated property for rental income, while a short term loan is for flippers who want to renovate and sell their property quickly.
Short Term Loan Options
Depending on your exit strategy, a short term loan can be a great way to get the money you need for purchasing a property and renovation. If you have a clear plan to sell your property within two years, a short term loan may be easier to get approved for and more affordable than a longer-term loan.
There are three primary short term loan options for house flippers.
Hard money loans are a reliable choice, especially for experienced investors. These short-term loans offer flexible repayment options of 12 months, 18 months, or 24 months to help get your latest flip started fast. While interest rates are higher on hard money loans, they are a great option if you’re working with a contractor or have an aggressive renovation schedule.
An investment property line of credit is ideal for covering renovation projects where you need cash fast. Like a home equity loan, this financing option is based on the equity you have in another investment property, but it must be one that you do not occupy. With short-term loan repayment options from 18 months to 24 months, this can be an easy way to shore up extra cash for seasoned investors.
Bridge loans are a short term lending option that is designed to help you buy another property before you’ve sold one. These loans are a smart choice for serial flippers who anticipate their house will sell soon. This type of loan offers 12-month to 18-month terms, so they can be risky if the market is performing poorly.
If a short term loan doesn’t fit your needs, a long term loan can offer more significant possibilities to generate income on your property.
Long Term Loan Options
If you plan to occupy the space that you are renovating or want to rent it out after renovations, a long term loan may be a better option for you. While long term loans commonly have fewer fees and lower interest rates, you may not have the equity or credit history necessary to get approved.
There are two popular types of long term loans for home renovators.
Cash-out refinancing loans are more like a traditional mortgage with 15 to 30-year loan terms. A lower interest rate makes this loan ideal if you can get a cash-out loan with low prepayment fees. This is also a good option if you are renovating a multi-unit property up to four units.
Home equity credit is a long-term loan against the value of your available equity and the value of another property. While home equity loans come with a 25 to a 30-year term, it can essentially be used as a credit card and paid off early to avoid paying extra interest. This is a flexible option if you already have a home or enough equity to support this financing option.
Taking a look at your financial situation, your cash on hand, and how long you intend to spend renovating can help you choose which loan is right for you. Once you’ve decided on a short or long term loan, the next step is choosing a realistic repayment schedule.
Choosing a Loan Term for Hard Money Loans
Hard money fix and flip loans are the most popular financing option because they offer short-term repayment schedules and approvals in as few as five days. The majority of people who use a hard money loan intend to buy, redo, and sell a property within a year. This makes loan terms between a year and two years ideal for almost any home renovator who can cover the steep interest fees.
It may be tempting to jump on the 12-month loan term when you see that hard money interest rates are usually above 10%. But, that may not be the best choice for your first investment property.
Choosing the right short term loan and repayment schedule takes careful planning. Decide which plan is right for you by creating a plan with your contractor and a realtor in your housing market.
Align With Your Contractor
If you choose to work with a contractor, it’s crucial to align with them on the scope and timeline of the renovation.
Working with a contractor can help you get approved for your first hard money loan. But, it’s crucial to know whether your contractor will have availability and the right people on hand to finish the job within a year. Having an unreliable or overbooked contractor can lead to spending much more money on interest than you intended.
Have a plan in mind for how much you intend to invest in the renovations before meeting with a contractor. While a contractor may have beautiful design suggestions, they may not be an appropriate option for a house in your neighborhood.
If this is your first time flipping a house and you’re working with a new contracting team, choosing a longer loan term may benefit you. Having extra wiggle room to complete your first renovation and sell your property can save you money in the long run. Otherwise, you may find yourself with a large loan to pay off without a sell date in sight.
Check the Housing Market
Second, consider your local housing market. If you’re purchasing a home with your hard money loan in December, you may find yourself with a fully renovated home that’s slow to sell during the winter. In this case, taking out an 18 or 24-month loan can allow you to list when the market is hot and ultimately earn more money on your flipped house.
It’s also important to consider how comparable houses in your market and neighborhood have been selling in the last year. If homes are spending months on the market, giving yourself more time to list and stay on the market may increase the likelihood that you earn a profit on your investment. A realtor may have some valuable tips to help you choose which house to invest in.
One of the biggest mistakes first-time house flippers make is renovating a house above the neighborhood’s price range. Before making your renovation plans, it’s essential to know how much you can invest before you price yourself out of the market. Even if your renovation is beautiful, most buyers are reluctant to buy the most expensive house in the neighborhood.
Get a solid understanding of who buys homes in the area by working with a realtor. Depending on the neighborhood you’re working in, your buyers may not be willing to pay extra for custom cabinets or an elaborate deck. If you’re flipping a home in an area you are not already familiar with, having a longer loan term can give you peace of mind while working with your realtor.
Find the Best Loan Option For You
Finding the right financing option is usually the part of house flipping that the TV shows leave out. You may think it’s a no-brainer, but you should consider all the factors of buying, renovating, and selling a flipped house before you choose a loan.
Whether a long-term or short-term loan is better for you depends on your exit strategy and renovation plans. Once you’ve found the right house, don’t forget to use this guide and explore your loan options.
Now that you’re clear on your loan options, and know what loan term you want, apply for a rehab loan from Orchard Funding! We’ll help you get the financing you need to start flipping your house right away.