FINANCIAL DEFINITIONS FROM A HARD MONEY LENDER
The world of finance and hard money loans is full of intimidating terms and lingo. At Hanson Capital Group, a private lender specializing in both hard money and soft money in Phoenix, AZ, we’ve been on both sides and we know how stressful and confusing the loan process can be…especially when you don’t understand all of the financial jargon.
Don’t worry. We’re here to explain a few of the most common lending terms in the simplest language possible. Stick with us and you’ll go from layman to loan-man in no time.
- Loan Points: a percentage or one time origination fee charged by the lender. One loan point is equivalent to one percent of the loan amount. For example, on a $100,000 home, one point is equal to $1,000.
In the last twenty years, loan points have been as high as 10 points. Other times, they’ve been as little as zero and today they’re averaging between 2 and 4 points.
- Loan to Value (LTV): The loan to value is calculated by dividing the loan amount by the property value. So, for example, if an individual wanted to borrow $80,000 to purchase a $100,000 property, the LTV ratio would be 80%.
The lower the LTV, the lower the cost of the loan. In essence, LTV is equivalent to risk.
- Loan to Cost (LTC): The ratio of the price paid for an asset to the value of the loan that will finance the purchase. When you’re paying less than something is worth, your loan to cost is going to be higher than your LTV.
- After Repair Value (ARV): refers to the value of a property after it’s been cleaned up and repaired.
Now that you know all of these terms, you may be wondering how they’re applicable to your loan. For starters, each and every loan has a specific amount of loan points, which will vary depending on the type of loan, the value of the property, etc.
As a hard money lender in Phoenix, Arizona, Hanson Capital Group is able to give borrowers flexibility in negotiating their loan points. Borrowers can either choose to pay a high interest rate and low loan points or vice-versa.
As far as LTV and LTC goes, Hanson Capital Group will finance 80% of the LTV or LTC, whichever is lower. As a rule of thumb, Hanson Capital Group does not lend money based on the ARV because there are too many unknown factors.
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