How to Become a Private Mortgage Lender
Earn High Fixed Rate Yields
Interest rates are fixed for the term of the loan. The specific amount of the fixed rate for any given loan is determined by the length of the loan in addition to the lender's individual needs or requirements.
Some lenders choose to receive monthly payments, for example, including principal and interest while others choose interest only which keeps 100% of the principal working for them.The amount of interest paid is determined by the way the private loan is structured.
- Rates are fixed between 8-12% during the term
- We pay simple interest on monthly payments
- We pay compound interest when interest accrues
- Short-term loans vary between 6-24 months
- Longer-term loans are typically 2 - 7 years
The most popular choice is to defer receiving payments in favor of a single balloon payment at the end of the term because this earns the highest yields.
Private Loans are Well Secured
How Are the Lenders Protected?
Lenders are protected by the same methods used by banks:
- Equity Cushion: Loan-to-Values are less than banks
- Promissory Note: Specifies the loan terms and security instrument
- Deed of Trusts: Secures the loan; recorded in county records
- Hazard Insurance: Policy names lender as beneficiary
Lenders are protected with an equity cushion because the maximum loan-to-value on properties we purchase is 70% or less on a first mortgage. That means we may borrow up to $70,000 on a $100,000 property. Banks typically loan 80% to 95% on first position mortgages.
We sometimes borrow offering a second deed of trust with a loan-to-value of up to 85%. In the case of a second position, we pay a higher interest rate.
The money we borrow is secured by a promissory note that outlines the detailed terms and conditions of the loan and identifies the security instrument. The loan is secured by a first or second first position Deed of Trust (mortgage), which is recorded with the county.
All closings and corresponding documents are completed by attorneys or title companies. Everything is handled in a legal and professional manner.
A Private Mortgage Loan Compared to a Regular CD Investment
As an example, consider a $100,000 investment in a Certificate of Deposit (CD) or retirement fund with a typical yield of 4% compounded annually. In five years, the initial investment will grow to $122,100. In contrast, the same $100,000 invested in real estate at 10% simple interest will grow to $150,000-a net increase of $27,900.
There Are No Hidden Costs: There are no commissions or "sales load" taken out of the loan dollars. We pay all costs involved to close the transaction. There is no cost to the investor. Any costs to the loan with the closing agent, recording of documents, title insurance, appraisal, or hazard insurance are paid by the borrower.