When you are borrowing money to buy real estate, it is different than almost every other category because you are securing the loan with property. Real estate secured lending is a type of lending that offers lower interest rates and longer payback terms, all because you have the piece of property securing the loan, which reduces the lender’s risk.
As of the spring of 2016, the average price to buy a home in the U.S. was $186,000. Since the vast majority of people don’t have that kind of money sitting around in the bank, they have to borrow money to make a purchase. Most people do not have the income required to be able to borrow almost $200,000 just on their good name, but when they are buying a home, the house acts as collateral to secure the home. The lender knows that if the borrower can’t make the payments, it can repossess the home and sell it to recoup its money. Despite the fact that it happens fairly often, more than 327,000 times in 2014, for example, lenders still view mortgages as fairly low risk, which is why interest rates are so low on those loans.
Real estate secured lending also is used in commercial real estate, although things work a little differently. For commercial property investing, you typically need more equity in the property — 30% vs. the standard 20% for a home — and loan terms usually aren’t as long. However, there are often more funding sources in commercial real estate than in residential real estate, as non only banks but also hedge funds and insurance companies offer financing for commercial real estate investing
For properties that are high risk or in distress, there is a type of funding called hard money lending. Hard money mortgage lenders offer loans on commercial real estate that carry high interest rates because of the risk involved. Such rates are usually about 15% or higher, and hard money lenders also require that borrowers have a lot of equity in their property — up to 50% — to mitigate the risks of lending. Hard money is usually a financing tool of last resort and often gets used as renovation financing to try to fix up a property for sale.
Whether you are buying residential real estate or investing in commercial real estate, real estate secured lending is the way to go due to its lower interest rates and favorable payback terms. The main drawback is that you risk losing your property if you default on the loan.
