You’ve done everything right: you’ve found the perfect hotel to fix up and sell, gotten a hard money loan, and are almost done. Then, unplanned delays occur, possibly due to a problem with the supply chain or a provider issue, and the 6-month deadline extends to 9 months. With its high interest rate of 10-15% and short term, your hard money loan is now a time bomb. For real estate owners, this scenario occurs frequently. A recent poll found that more than 40% of fix-and-flip projects are held up for 2 months or more. A hard money refinance is an essential tactic in this case.
You can get rid of your current high-cost, short-term loan and replace it with a more stable form of borrowing. Private lending for real estate can help you buy a house very quickly, but because the loans are only good for a short time, they can become a problem. When you refinance, you can get rid of a loan that is about to expire, giving you the time you need to finish your project and get the most out of your investment.Â
What is a Hard Money Refinance?
A hard money refinance is a way for a real estate owner to move their money around by taking out a new loan to pay off an old, short-term hard money loan. It lets the investor switch from a loan with high interest rates and short repayment terms to one with better terms. This gives them more time to finish their project and get stable funding.
It’s like this: the first hard money loan is like a short-term bridge loan. It helps you get the money you need right away, like for a quick fix-and-flip purchase. That being said, if your project is late, you’ll be stuck with an expensive loan. A hard money refinance is like a new, longer bridge. It gives you the time and stability to get to your final goal, which could be selling the property or getting a long-term commercial real estate refinance choice. One of the most popular ways for owners to refinance is through this method, which helps prevent the loan from going into default and keeps them from losing a valuable investment.
The “Why”: Reasons to Refinance a Hard Money Loan
Real estate owners refinance a hard money loan to obtain more time and better terms for their project, as the original loan was too short-term and costly. The main reasons people refinance are to make the loan a long-term answer, extend the time it takes to make the investment, and lower their monthly payments.
Extend Your Investment Timeline
The terms of hard money loans are usually very short, between 6 and 18 months. This is because they are meant to be paid back quickly. When building problems, delays in getting permits, or a slow market cause a fix-and-flip project or a more involved rehab for a hospitality property to run behind schedule, the short term of the loan can become a big problem. A hard money refinance gives the owner more time by usually making the loan term longer. This gives them the time they need to complete the repairs, make the house safe, and either sell it or secure a longer-term loan without worrying about a tight, expensive timeline.
Lower Your Monthly Payments
One of the worst things about hard money loans is that they cost a lot. Most of the time, hard money interest rates are between 9% and 18%, which is a lot higher than regular loans. By refinancing, an investor can get rid of this expensive loan and replace it with a new one with a much lower interest rate. This will lower their monthly interest payments right away. This extra cash flow can be significant for paying for ongoing project costs, especially if the project is taking longer than planned. It’s one of the most crucial refinancing options for investors seeking to maximize their returns.
Convert to a Long-Term Solution
People who invest in real estate often plan to “fix and hold” a property to make rental income instead of selling it quickly. This is because hard money loans are short-term tools. A long-term loan is necessary for this plan. The investor can pay off the short-term fix-and-flip loan and switch to a better long-term loan, like a regular mortgage or a DSCR (Debt Service Coverage Ratio) loan, by refinancing. Because the borrower is only required to show the property’s cash flow and not their own income, DSCR loans are popular for investment properties. This is because they are an excellent way for investors with multiple properties to refinance their business real estate.
How Hard Money Refinance Works: A Step-by-Step Guide
Refinancing a hard money loan involves a straightforward, four-step process, from initial evaluation to closing the new loan. It’s a strategic move that requires careful planning to secure the best possible terms.
Step 1: Evaluate Your Situation
Before you start looking for a new loan, it’s essential to understand your current financial situation. First, assess the property’s current value. Has your rehab increased its worth? Lenders will use the new, post-renovation value to determine the loan-to-value (LTV) ratio, which is a key metric for refinancing. You should also review your own financial position, including your credit score and cash flow. While many refinance options are asset-based loans, explained as being primarily concerned with the property’s value, a strong financial profile can help you secure better terms and interest rates.
Step 2: Choose the Right Loan
The next step is to choose the type of loan that best fits your new strategy. Here’s a comparison of standard refinance options for investors:
| Loan Type | Pros | Cons |
| Traditional Bank Loan | Lowest interest rates Long repayment terms (15-30 years)Â Can be used for fix-and-hold strategies | Slow approval process (30-60+ days)Â Strict qualification criteria (high credit score, W-2 income)Â High closing costs |
| DSCR Loan | Faster approval than traditional banks Qualification based on property’s cash flow (not personal income) Ideal for real estate investors with multiple properties | Higher interest rates than traditional loans May require a higher down payment Still has a formal underwriting process |
| Private Lending for Real Estate | Faster approval than traditional banks Qualification based on the property’s cash flow (not personal income) Ideal for real estate investors with multiple properties | Higher interest rates Shorter loan terms than traditional loans May have higher origination fees |
Step 3: The Application and Underwriting Process
Once you’ve chosen a loan type, you’ll submit an application. The documentation needed for a refinance is similar to the original hard money loan, but with a greater focus on the property’s current state and value. You’ll likely need a recent appraisal, a title report, and proof of property insurance. The lender’s underwriting team will then review all documents to assess risk. The underwriting for a refinance differs from that of a new loan primarily in its focus. Instead of evaluating a new purchase, it assesses the stability of an existing asset. It ensures the new loan is a viable exit strategy for the old one.
Step 4: Closing the Loan
The final stage is closing. This is when all the paperwork is signed, and the funds from the new loan are used to pay off the old hard money loan. You’ll be responsible for closing costs, which typically include appraisal fees, title insurance, and loan origination fees. These costs vary depending on the lender and the loan amount, and they can be factored into the new loan. Once the closing is complete, the old hard money loan is settled, and you can move forward with your extended timeline and more favorable terms.
Types of Loans for Refinancing
For a hard money refinance, investors choose from various loan types, each with a different purpose and set of requirements. The most common options include traditional loans, DSCR loans, and new bridge loans.
Traditional and Conventional Loans
The most common way to get long-term financing is through traditional and standard loans. They are perfect for owners who have finished fixing up a house to sell and now want to “hold” on to it as a rental. Most of the time, you have 15 to 30 years to pay back these loans, which have the lowest interest rates. But it’s harder to get a standard loan than it is to get a hard money loan.
Lenders have tight rules, such as needing a high credit score (usually 680 or higher), a low debt-to-income (DTI) ratio, and a steady income that can be proven. These loans are best for experienced owners who have a good track record with money and plan to keep the property for a long time.Â
DSCR Loans
A Debt Service Coverage Ratio (DSCR) loan is provided to individuals who own rental properties, such as hotels, motels, leisure centers, and vacation centers, and wish to generate income from them. Instead of the investor’s own income, they look at the property’s cash flow, which makes them different from standard loans. Divide the property’s net operating income (NOI) by its overall debt to get the DSCR. If the property made $100,000 in NOI and paid $75,000 in debt each year, its DSCR would be 1.33. Lenders usually want a DSCR of 1.25 or more, but this can change for different types of homes.
Because the income from a hotel business property or a short-term rental is more likely to go up and down, lenders may want a higher DSCR, around 1.40 or 1.50. A DSCR loan is an excellent option for investors who own multiple buildings or have a lot of personal debt because it lets them get money based on how well their business does.Â
Bridge Loans
A project might not always be ready for a standard or DSCR loan. It may still require significant repairs, or the investor may need more time to find a renter. In these situations, you can use a new bridge loan to pay off an old one. This plan gives the borrower a safety net by delaying the loan’s due date for another 6 to 12 months. It has the same high interest rates as the first loan, but it keeps the debt from going into default, which would have cost a lot. It gives the owner enough time to make sure the property is fully stable.
This is a short-term solution for a short-term issue, typically used when the property is still in the process of changing hands and has not yet become a stable, long-term asset.Â
Refinancing Challenges and How to Overcome Them
Real estate investors often face hurdles when refinancing a hard money loan. The two most common challenges are a low appraisal and the lack of a clear exit strategy. Navigating these obstacles is crucial to a successful refinance and long-term financial health.
The Appraisal Hurdle
A property appraisal is the most critical factor in a refinance. A low appraisal can significantly impact the loan amount a new lender is willing to offer because it directly affects the loan-to-value (LTV) ratio. The LTV is the ratio of the loan amount to the property’s appraised value. Suppose the appraisal comes in lower than expected. In that case, the LTV increases, which can lead to a smaller loan, higher interest rates, or even a denied application.
To overcome a low appraisal, you can:
- Review the appraisal report for errors. Check for simple mistakes, such as incorrect square footage, the number of bedrooms, or missing property features.
- Provide a list of improvements. Document all renovations and upgrades you’ve made to the property, including receipts and before-and-after photos. This can give the appraiser a more accurate picture of the property’s increased value.
- Challenge the appraisal. Suppose you believe the appraiser missed comparable sales or used inaccurate data. In that case, you can submit a formal appeal through your lender.
- Consider a second opinion. In some cases, your lender may allow for a new appraisal from a different appraiser.
The Right Exit Strategy
Many investors get into trouble by focusing only on the short-term fix-and-flip and not having a clear exit strategy. A hard money refinance is a temporary solution, not a permanent one. Without a long-term real estate plan, investors risk getting caught in a cycle of expensive, short-term loans. This can erode profits and increase the risk of default.
To avoid this, you must have a clear plan from the beginning. Before even securing your first hard money loan, ask yourself these questions:
- Will I flip this property? If so, a refinance is just a temporary bridge while you find a buyer. You must ensure the property’s value is high enough to cover the new loan and leave a profit.
- Will I hold this property as a rental? If your goal is to generate passive income, you need to plan for a long-term conventional or DSCR loan. This requires building a strong credit history and ensuring the property’s cash flow can support the new loan’s payments.
- What if the market changes? Have a contingency plan. A new bridge loan or a different lending type might be necessary if your initial plan falls through.
Having a well-defined exit strategy is not just about having a backup plan; it’s about making a wise investment in the first place.
The HotelLoans.Net Advantage
The details of a hard money swap can be intricate to understand on your own, but you don’t have to. HotelLoans.Net is a direct lender that specializes in private loans for real estate. They are both a correspondent lender and a table backer. Because we are in a special situation, we can not only underwrite and fund loans from our own portfolio, but we can also use a vast network of funding partners to make sure you get the best rates and terms possible. We’ll be your single point of contact, making the entire process easier and providing you with the expert advice you need to execute your exit plan and secure a stable, long-term financing solution.
We can help you overcome challenges like a low appraisal or a tight deadline, as we have extensive knowledge of hard money and offer various refinancing options for buyers. We know that the property you want to buy or sell is more than just a deal; it’s an investment in your future.
Are you ready to find the best way to refinance your hotel? Get in touch with us right away to get a free appointment or find out more about our referral programs. We can help you turn a problem into a long-term win.
Conclusion
A hard money mortgage is an excellent way for people who want to buy a house to get cash. You can get rid of an expensive, short-term hard money loan and replace it with a longer-term loan that will give you more time and freedom to finish your project. You can make better decisions with your real estate investors’ money if you know “why” and “how” to refinance. For example, you can learn how to lower your monthly bills or rent out your home for a long time.
The steps are easy to follow, but they are difficult. They will help you get out of a short-term, high-interest loan and into a safe financial future. Suppose you carefully look at your situation, choose the right loan, and have a clear exit plan. In that case, you can avoid common problems and make sure your investment is a success. It’s not enough to just pay off a loan with a good hard money refinance. You should also take back control of your investment, protect your gains, and give your whole real estate portfolio more power.
FAQs
How soon can I refinance a hard money loan?
There’s no single answer, as it depends on the type of refinance you’re seeking. For a cash-out refinance, most lenders have a “seasoning period” of at least 6 to 12 months. This period ensures the property has a stable, increased value after renovations. For a simple rate and term refinance—where you’re not taking out cash—you might be able to refinance much sooner, sometimes immediately after closing on the initial hard money loan.
What is the maximum LTV for a hard money refinance?
The maximum loan-to-value (LTV) for a hard money refinance varies significantly by lender and the property’s condition. While traditional mortgages might offer an LTV of up to 80% or more, hard money loans and their refinances are generally more conservative. Lenders typically offer an LTV between 50% and 75% of the property’s post-renovation value (ARV). This lower LTV ratio reflects the higher risk associated with private lending.
What is the difference between a hard money loan and a bridge loan?
The terms hard money and bridge loan are often used interchangeably, but there’s a subtle difference. A hard money loan is always an asset-based loan secured by real estate and funded by a private lender. A bridge loan is a type of short-term loan used to “bridge” a financing gap, but it can be offered by both private and traditional lenders. In most real estate investment scenarios, a hard money loan is a form of a bridge loan.
Can I refinance a hard money loan with no income?
Yes, it’s possible to refinance a hard money loan without traditional income verification (W-2s, tax returns). DSCR loans, as mentioned in the blog, are designed explicitly for this purpose. They qualify borrowers based on the rental income generated by the property, not their personal income. This makes them an excellent solution for self-employed real estate investors or those with high personal debt.
What are the typical interest rates for a hard money refinance?
Interest rates for a hard money refinance are typically higher than those for conventional loans. Still, they are often lower than the initial hard money loan’s rate. Rates can range from 9% to 18% or more, depending on factors like the borrower’s credit score, the property’s LTV, and the location. Lenders also charge “points,” which are upfront fees equal to a percentage of the loan amount, typically between 1% and 3%.
