It may seem counterintuitive, but using hard money loans in a high-interest-rate environment can make more sense than using them when rates are low. Unlike bank loans, whose interest rates are tied to the prime rate and move with the Federal Reserve’s decisions, hard money loan interest rates do not fluctuate as much.

Most commercial real estate purchases are financed with loans from a bank, a life insurance company, or a private money lender. When rates are low, borrowers who can obtain a bank loan enjoy a significant cost advantage. As rates rise, that gap narrows, and an increasing number of buyers choose private lending for their leverage. Understanding how each option responds to market conditions can help you choose the right financing for your next deal.

How Do Higher Interest Rates Affect Hard Money Loans?

Higher interest rates raise bank borrowing costs quickly, but they have a smaller effect on hard money loans. Private lending rates are set by investor return expectations and the risk of each deal, not tied directly to the prime rate. As a result, the private lending rate environment tends to stay steadier than the banking side, and rising rates narrow the cost gap between bank and hard money financing.

How Banks Set Their Rates

How do banks set their rates for commercial real estate loans? At the end of the day, banks don’t fully set them. Bank rates are driven largely by the Federal Reserve, which raises or lowers its benchmark rate based on its approach to containing inflation. Banks offer their prime rate to a select few customers, but most borrowers pay 1% or 2% over prime for their real estate loans. On loans with floating rates, every rate hike can push payments higher.

How Hard Money Lenders Determine Interest Rates

Private lending rates are not as dependent on what rate the Fed wants to see. The capital used by hard money lenders typically comes from groups of investors who like the higher yields hard money loans provide. This return ranges from 9% to as high as 12% or more.

Those returns are high enough that they do not have to move up and down like bank rates. For example, a 10% return on capital is so attractive that when prime goes up by ¼% or even ½%, the rate does not have to increase to attract investors.

Other Factors That Influence Loan Pricing

Within that range, private lenders price each loan based on the deal itself:

• Property value and loan-to-value (LTV). The lower the loan amount relative to the property’s value, the less risk the lender takes on.
• Deal risk. Property type, condition, location, and occupancy all affect pricing.
• Loan term. The length of the loan and any extension options influence the overall cost.
• Exit strategy. Lenders want to see a clear, realistic plan to repay the loan, whether through a sale or a refinance.
• Borrower experience. Hard money lenders focus on the asset, but credit history and track record still factor in.

Why Do Borrowers Still Use Hard Money Loans When Rates Are High?

Hard money loans, also called bridge loans, are typically more expensive than bank loans. So why do savvy commercial investors like to use them? Because banks are strictly regulated, they have more rigid approval requirements, and many loan applicants are not approved. Hard money lenders use asset-based underwriting, lending only 60% to 70% of a property’s value versus 80% or more at banks. That conservative approach is what allows them to be more flexible and offer the benefits of private capital lending.

Speed When Timing Is Critical

A hard money lender may need only a few days to underwrite and close a loan, instead of the weeks, sometimes even months, required by regulated banks. Because of that speed, sellers are normally more inclined to accept an offer with a quick close than one contingent on bank financing with a long contingency period.

Flexibility When Closing Matters Most

Private lenders can also structure loans with more flexibility than banks, which can make a significant difference to their borrowers. Sometimes the ability to close a transaction matters more than securing the lowest possible interest rate, such as a time-sensitive acquisition or a distressed property that a bank won’t finance. In those cases, hard money can be the better choice.

What Should Borrowers Consider Before Taking Out a Hard Money Loan?

Before taking out a hard money loan, look at the full cost of borrowing and how it fits your project:

• Interest rate. With hard money rates generally ranging from 9% to 12% or more, build that cost into your projections from day one.
• Points and fees. Ask about origination points, extension fees, and other closing costs. Compare total borrowing costs, not just the rate.
• Loan term. Hard money loans are short-term by design, so make sure the term gives you enough time to complete your plan.
• Exit strategy. Know how you will repay the loan, whether through a sale, a refinance into long-term financing such as a DSCR loan, or another source. Montegra outlines several exit strategies for private capital loans worth considering.

Most importantly, weigh the project’s expected return against its financing costs. If a short-term loan lets you buy a property at a good price, complete improvements, and raise its value, the higher interest rate may be a small cost for the return it makes possible. If the deal only works at bank rates, hard money may not be the right fit.

When Does a Commercial Bridge Loan Make Sense?

A bridge loan provides short-term capital to carry a property from one stage to the next, until it can be sold or refinanced into permanent financing. Even in a rising rate environment, bridge loans make sense for:

• Commercial acquisitions that need to close fast. A quick close can secure a property before competing buyers with slower financing.
• Refinancing deadlines. A bridge loan can pay off a maturing loan while you arrange longer-term financing.
• Property improvements. Renovating or repositioning a property can increase its income and value before it qualifies for bank debt.
• Other transitional needs. Leasing up a partially vacant building or resolving a partnership change are common examples.

In these situations, speed and flexibility can justify higher financing costs. Paying a higher rate for a short term is often far less costly than losing a deal or missing a loan maturity.

Montegra sees this regularly. Many of our loan requests come from borrowers who were promised a bank loan, then told a week or two before closing, with significant earnest money at risk, that their loan was not approved. With efficient and speedy underwriting, Montegra can close in time to save the deal.

Working With an Experienced Colorado Hard Money Lender

Montegra has a 50-plus-year history of underwriting and funding rapid closings for buyers of commercial and investment residential properties. As a Colorado direct lender, we offer immediate decisions and rapid closings, whatever the interest rate environment.

If you are considering commercial hard money or bridge financing in Colorado, contact Montegra or reach out to Bob Amter (bob@montegra.com) or Kim Skari (kim@montegra.com) to discuss your financing needs. Ready to get started? Apply online.