Considering Applying for Commercial Hard Money Loans? Pre-payment Penalties you should Remember

Commercial hard money loans are similar to mortgages. They use assets as collateral and may not always have a home. However, commercial hard money loans differ from traditional loans, and the requirements of these mortgages are often less appealing to investors.

last updated Friday, April 11, 2025
#Commercial Hard Money #Loan Prepayment

by John Burson

Pre-payment Penalties you should Remember

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Commercial hard money loans have higher interest charges, down payments, and less flexible conditions.

Commercial Hard Money Loans Prepayment Terms

All mortgages carry some prepayment risks to the borrower. Sometimes they can get confused and think that prepayment is reasonable. Remember that the commercial hard money loan financier will need the money for the mortgage. After you prepay, the potential interest the lender earns after financing is cut. Therefore, to protect themselves from this, they have a prepayment penalty. The penalty is meant to encourage you to fulfill the contract or share some of the profit with the commercial hard money loans lender if you close the commercial hard money loans early.

Commercial Hard Money Loans Interest Charges

The prepayment penalties can sometimes be minor, and that’s why commercial hard money lenders set astronomical fines. Usually, there are only two main ways of allotting payments on loan installments. The first way is structured so that the interest rates are charged monthly. The price is moved to the small interest rates set on each month’s payment. The remaining amount goes to the principal. Therefore, the principal reduces each month from the initial month.

The other way involves using a commercial hard money loan lender. Your mortgage interest can be calculated and paid before repaying the principal debt. The amount transferred to the commercial hard money loans lender in the early months of the mortgage sometimes is almost 100% in interest payments, and the principal only reduces slightly. Sometimes this is considered illegal.

Commercial Hard Money Loans Prepayment

When the second strategy is applied, the remaining principal will remain high in the mortgage’s maturity. If the commercial hard money borrower prepays the mortgage, the financier will provide them with a prepayment figure based on the principal amount. Sometimes the principal can be as high as the initial loan amount.

Besides the high fees, the lender can also include a prepayment penalty. Because many of these borrowers have bad credit, the negative report will be detrimental.