Private Mortgage Rate Shock
“Private Mortgage Rates Are Often Surprising To Borrowers That Have Only Paid Conventional Interest Rates In The Past”
If you are considering a private mortgage for the first time, you may have a bit of sticker shock when comparing private mortgage interest rates to conventional mortgage rates.
Private money is more expensive and is that way for a reason.
The risk of the financing being considered is either higher resulting in the higher cost of funds, or the process is streamlined for faster access to capital, which also comes at a cost for providing the service.
How much higher are private mortgage rates?
If you’re talking about a first mortgage on a residential or commercial property, private lending rates typically will fall in the 7% to 11% range, where conventional mortgages fall more into the 3% to 5% range.
So in some cases, private interest rates can be significantly higher.
That being said, when there is a large competitive interest in financing a mortgage, competition will almost always drive rates down.
So when you have private mortgage rates that are at the higher end of the range, its likely because there either aren’t enough interested lenders, or there aren’t very many interested lenders that can move as fast as you require.
Remember that a private mortgage is short term lending instrument that basically allows an individual or business to transition from one financial position to another by providing the commodity of time.
Most private mortgages are for a period of one year.
During that one year period, the borrower has the opportunity to improve his or her financial position in order to qualify for bank or institutional financing, sell the real estate security in order to preserve the equity value, utilize the cash from the private mortgage to complete a transaction whereby the proceeds from same can repay the private mortgage.
Rest assured that if there was a significant enough of a market, and a large enough profit opportunity for equity mortgages where pricing could be lower, banks and institutional lenders would be providing mortgage products to this market segment.
But they are not.
In fact, one can argue the sub prime mortgage offerings from some institutional lenders are more expensive and restrictive than comparable private mortgage offerings.
The other thing to consider when it comes to interest rate is the cost of financing compared to what will happen if you don’t refinance your mortgage or raise the incremental capital you’re looking for.
The opportunity cost of missing out on a great transaction, be it real estate or something else, can be considerably more than the interest paid on a private mortgage.
In situations of conventional mortgage distress where the lender is demanding full repayment or is in the midst of foreclosure, the cost of a private mortgage can be a small fraction of the amount of equity that can be destroyed from losing your home as well as the incremental living costs you are going to incur moving somewhere else.
Basically, any financing cost is relative to the risk of the situation being financed.
Private mortgage rates are no different in this regard.
If you would like to learn more about private mortgage rates and financing options, I suggest that you give me a call so I can quickly go over your situation and discuss different alternatives with you.
Click Here To Speak With Toronto Private Mortgage Broker Joe Walsh