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

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

Commercial Hard Money Loans Prepayment Terms

All mortgages carry some prepayment risks to the borrower. Sometimes he or she can get confused and think that prepayment is good. Remember that the commercial hard money loan financier will need the money for the mortgage back. 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 either encourage you to fulfill the contract or sharing with the commercial hard money loans lender some of the profit if you close the commercial hard money loans early.

Commercial Hard Money Loans Interest Charges

The prepayment penalties can sometimes be small, and that’s why commercial hard money lenders set astronomical penalties. Usually, there are only two main ways of allotting payments on loan installments. The first way is structured in a way that the interest rates are charged on a monthly basis. The payment is moved to the small interest rates that are charged 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 amount can be calculated up front and then paid off 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

In a situation where the second strategy is applied, the remaining principal will remain high into the mortgage’s maturity. In case 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.

Other than 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.