How hard money actually works
A bank asks: can this borrower repay over 30 years? A hard money lender asks: is this property good security for 12 months, and does the plan make sense? That inversion explains everything else — the speed (less underwriting of you), the cost (private capital, short horizon, real risk), and the structure:
- Term: commonly 6–24 months, sometimes 36. This is bridge capital, not a mortgage — every hard money loan needs a written exit: sale, refinance, or payoff.
- Payments: usually interest-only, with the principal due as a balloon at maturity.
- Leverage: most lenders cap at 65–75% of the property's value — meaning 25–35% down (or that much equity in a refinance). Lower leverage buys a lower rate.
- Speed: days to about two weeks from application to funding is normal when title and insurance cooperate — the whole point versus a 30–45 day bank escrow.
What it costs, honestly
Example (illustration only — every deal prices differently): a $400,000 loan at 11% with 2 points for 12 months runs about $3,667 a month interest-only, $8,000 in points at closing, plus lender/doc/inspection fees — call it roughly $55,000 for the year if held to maturity. That number is why the exit plan matters more than the rate: hard money priced into a profitable flip is a cost of goods; hard money with no exit is a countdown.
| Component | Typical 2026 range | Notes |
|---|---|---|
| Interest rate | ~9.5–12.5% | Strong deals below 60% LTV see the low end; high leverage prices toward the top |
| Origination points | 1–3 | Paid at closing; occasionally more on small or difficult loans |
| Loan-to-value | 65–75% | Of as-is value (rehab deals size off ARV — see the fix & flip guide) |
| Term | 6–24 months | Extensions exist — get the extension fee in writing up front |
The jobs hard money is actually for
- Fix & flip — speed to win the deal, rehab funds in draws, repaid at resale (full breakdown in the construction & flip guide).
- Bridge — buy the next property before the current one sells, then repay from the sale.
- Deals a bank can't close in time — auctions, probate purchases, expiring contracts, partner buyouts.
- Strong equity, complicated paperwork — self-employed income a bank reads poorly (see how lenders read self-employed returns), recent credit events, foreign income. The equity carries the file while you fix the paperwork — the standing plan is almost always “hard money now, refinance into cheaper debt soon.”
- Business-purpose cash needs secured by investment real estate. The loan's purpose matters legally — which is the next two sections.
Why 11% is legal in California — the usury rules in plain language
California's constitution caps interest on private loans — roughly 10% for most personal-purpose loans (the exact formula varies by loan purpose). So how does professional hard money exist? Because the law exempts licensed lending, and the exemptions swallow the rule in practice:
- Loans made or arranged by a California-licensed real estate broker and secured by real property are exempt (Civil Code §1916.1).
- Loans made by licensed California finance lenders (CFL) are exempt.
The practical takeaway isn't academic: work with licensed operators, and verify the license — a DRE broker license you can look up on the state's DRE site, or a CFL license on the DFPI's. An unlicensed private loan above the cap can create serious problems for everyone involved. This is education, not legal advice — structure questions belong with a lawyer.
The owner-occupied trap — read this before borrowing against your own home
Hard money on a property you live in is a different legal world. A consumer-purpose loan on a primary residence triggers federal consumer protections — Dodd-Frank ability-to-repay verification, TILA disclosures, rescission rights — and most private lenders simply decline these loans rather than carry the compliance burden. A few specialists exist, at real cost.
If the actual problem is bruised credit and you want a home to live in, hard money is the last resort, not the first: FHA allows 3.5% down at a 580+ score (10% down at 500–579), and non-QM programs price bad-credit files far better than a 12% balloon note does. A short-term private loan against your own house, interest-only, with the whole balance due in a year, is how people with equity lose houses. Talk to a licensed lender about the consumer paths first — every one of them beats this page's subject for a home you intend to keep.
How to vet a hard money lender
- License first: DRE or CFL, looked up, current.
- Everything in writing before you pay anything: rate, points, all fees, term, extension terms and cost, prepayment terms, default interest rate, and — on rehab loans — exactly how draws fund.
- Beware large upfront “due diligence” fees from lenders you can't verify — the classic advance-fee scam wears a lending costume. Reasonable third-party costs (appraisal, title) are normal; four-figure fees to “review your file” are not.
- Ask what happens at maturity if the exit slips. The honest lenders have a clear extension policy; the predatory ones are counting on the default.