Borrowing money can be a stressful experience, even if it’s a part of your job. Whether it’s your first or your hundredth loan, there’s always a level of trepidation that comes with spending money you don’t yet have.
That being said, with any good loan, you should always be able to calculate the potential risks from the outset, so you know what it is you’re getting into. While circumstances can change, and things might not always go according to plan, the potential costs should always be predictable from the outset.
But what if someone changed the deal?
Why Do Banks Give Variable Rate Loans?
Variable-rate loans might seem enticing at first glance because they often start at a lower rate, but the catch is that they are tied to external interest rates. If those interest rates go down, your repayments go down, but if interest rates go up, your repayments will go up.
While this will often save money in the short term and can save money in the long term, it introduces a degree of instability and uncertainty.
Interest rates are not easy to predict, and predictions can be unreliable at best, which is why tying your costs to a shifting number might not be the best idea.
Fixed Rates are Stable Rates
When you take out a fixed-rate loan, the repayments may look high, but they are reliable. In effect, you’re taking a much lower risk and putting yourself in a much more stable financial position.
While it’s true that the potential profits might be slightly lower, they are far easier to calculate ahead of time.
When it comes to planning ahead, the benefits of fixed-rate loans are undeniable.
Hard Money Loans are Predictable
Now banks do also offer some fixed-rate loans, and while there are benefits to working with a bank, when it comes to real estate, you should really be considering a hard money loan.
Hard money loans are also fixed-rate but come with far more flexible terms upfront. As with standard fixed-rate vs. variable, hard money lenders will usually have a higher repayment than bank loans, but deals will usually be closed faster, which can lead to better profits for the client.
Furthermore, with hard money lenders, as you build up your portfolio, the terms will get better.
Playing The Long Game
A lot of the time, when people talk about hard money lending, they talk about the short-term benefits. People will tell you that hard money makes it easier for new investors to get into real estate, that they might cost more, but they’re an opportunity to get some experience.
While all that is true, what people often overlook are the long-term benefits of working with hard money lenders.
You see, hard money lenders aren’t just interested in short-term profits. A good lender wants to work with reliable clients and will be willing to offer them more enticing terms to keep them around. When you work with hard money lenders, you’re not just working on this deal but developing long-term proof that you’re worth the investment.
At the end of the day, real estate investments are large, long-term commitments, and, in many ways, fixed-rate, hard money loans are the most stable and most reliable path to profit.