Private Mortgage Loans - Short-Term Financing Alternative

Private Mortgages

Private mortgage loans are made by private lenders instead of traditional financing sources such as banks, trust companies or credit unions. They usually are short-term (1 to 3 years). Sometimes referred to as hard money or asset-based loans, the decision to lend is based on the equity and value of the property being put up as collateral, not the borrower's credit.

Why Borrow Private Money?

With private loan interest rates of 10 to 15 percent borrowers pay a significant premium over conventional mortgages for a private mortgage loan. This is a good deal for private mortgage lenders, but why would borrowers want to pay these high rates when conventional mortgages range between 5 percent and 7 percent? Many reasons exist, but all generally fall into one or more of the following categories:

Other money sources are not available - A borrower may not qualify for an institutional mortgage loan for reasons ranging from low borrower credit scores or too much borrower debt. In these cases private mortgage lenders may be the only available resource.
Ease of Application - While a borrower's lack of up-to-date personal financial information would negate or at least delay approval for an institutional mortgage, it should have no effect on the ability to obtain a private mortgage loan. If the property value is high enough and the income being generated from it is sufficient to pay the interest on the debt, the borrower's personal financial situation should not affect the private mortgage lender's decision.
Speed with which funds can be made available - Private mortgage lenders usually can complete a transaction within seven to 10 days. Since the property itself is the main criteria used to determine loan eligibility, less information on the borrower is required, resulting in a much quicker approval process.
Investment parameters – While private lenders all have parameters on what properties they will or will not lend on including various loan to values, as a borrower it is important for you to develop some parameters of your own before entering into a mortgage contract. Sophisticated Real Estate investors will have the tools to do their due diligence however the novice investor or borrower with dented credit where other money sources are not available will need guidance. Novice investors would do well to seek the advice of their accountant/tax advisor.
At Verico Accede Mortgage Group Inc. we often counsel individuals with dented credit whose only source of funds is private money. Where the intended use of funds is for a home purchase the question to be answered is one of whether or not they should “Rent or Buy”

Should I Rent or Buy?

To answer this question let’s use an example that requires we refer to two calculators (Mortgage Isolator & Rent vs. Buy) on our Calculators page. The Mortgage Isolator calculator solves for the fourth element when three of four are known while the Rent vs. Buy calculator answers that specific question with a recommendation to either Buy or Rent. Our prospective buyer:

was discharged from bankruptcy a week ago
has not been able to re-establish credit and realizes that it will be two years at least before he will be able to approach a conventional lender to get the benefit of lower rates.
has a down payment of 15% of the purchase price plus broker fees of an intended purchase of $225,000.00.
Currently pays $800.00 in rent.
Will have to pay 10.75% interest on the borrowed funds while the maximum mortgage that can be registered cannot exceed 87.5% of the appraised value or purchase price, whichever is the lesser.
The purchaser believes that property values in the area are appreciating at 6% per year.
Will have to make monthly mortgage payments of $1862.00 (Mortgage Isolator calculator) plus taxes of $180.00 for a total payment of $2042.00/mo

When we use the Rent vs. Buy calculator it returns a recommendation to “Buy”. This is why:

Your mortgage of $196,956.51 will be paid down by $3611.47 over 2 years.
The property will increase in value by $28515.32 over 2 years for a total investment growth of $32126.79.
Your total equity in your property at the end of 2 years would be $65,876.79 (down payment + investment growth)
This total is greater than your total investment growth from renting, which is approximately $18874.17 after 2 year(s). This was calculated by growing the monthly savings from renting ($1242.00) plus your current down payment of $33750.00 at a standard after-tax rate of 4% per annum.

It should be noted that if the cash savings from renting is not invested the advantage from buying would be much greater. The additional monthly mortgage payment in effect acts as a forced savings plan.

In summary, while it is always nice to get the lowest possible rate when arranging a mortgage, there are many occasions when, even if you have to pay a higher rate, it makes sense to buy. Of course if the higher monthly mortgage payments won’t let you sleep at night you should set your sights on purchasing a home where the payments are lower. The Mortgage Isolator calculator can be used to calculate a maximum mortgage for a given monthly payment.

If doing all these calculations confuses you then give us a call @ 1-403-581-4654. We’ll be glad to help you out.