Private Lender Refinancing

by Vic Bassey

As the market for traditional loans continues to experience uncertainty, private lender refinance has become an increasingly popular option for borrowers. While exceptional opportunities exist in real estate and business development, banks are increasingly tightening qualification requirements and making fewer loans. This has created an environment where private lenders have emerged to provide capital to numerous individuals and businesses.

Refinancing a Private Mortgage

Loans that have an adjustable rate or balloon payment provision are particularly suited for refinancing. Adjustable rate loans periodically reset based on changes to various indices such as LIBOR or the CMT. Loans with balloon payments typically defer interest and part of the principal to a future date. This allows for lower monthly payments over the term of the loan, but requires one large payment on a specified date that satisfies the balance and accrued interest. Lenders are particularly reluctant to offer long term loans against commercial real estate, so balloon provisions are common.

For either adjustable rate mortgages or loans with a balloon payment, refinancing at some point is often a necessity. When loans reset or a balloon payment is due, the financial requirements are often beyond what the loan holder can comfortably afford to pay.

In the past, borrowers would simply refinance the loan and convert it into a fixed rate instrument. Unfortunately, turmoil in the real estate and financial markets has resulted in stricter bank lending standards and reduced levels of refinancing activity. Borrowers that hold debt on property that has depreciated often find themselves unable to repay the loan and no options for refinancing.

Benefits of Private Lenders

Private lenders include a group of individuals that have the resources available to participate in hard money lending. They come from a variety of professions and backgrounds. While some are familiar with basic lending practices, others may be new to the process and simply looking for superior returns of their liquid capital.

A refinanced loan will have a much shorter approval process through a private lender. While traditional banks require endless financial documents and cumbersome procedures that can delay loan approval up to 90 days, private lenders usually will finish the process in under a week. This can be especially beneficial to mortgage holders under default or foreclosure pressure and businesses looking to complete a project on time. Banks focus primarily on the applicant’s assets and credit history, while private lenders are more interested in the cash to value ratio of the loan versus the tangible asset. Especially in the current economic environment, private lenders find an endless number of high quality borrowers unable to secure loans from banks and mortgage lenders.

Other Considerations

It is important to understand that a lender who is involved in private refinance, loans money with the expectation of receiving a higher rate of return than what a bank might charge. This premium is associated with easier qualification requirements and greater risk on the part of the lender.

The term of a privately refinanced loan is usually no more than 10 years. Borrowers with longer term requirements should remain aware of other refinance options as the economy improves and lending standards relax.

Where to Find Private Lenders

Private lenders can be found locally through civic clubs or real estate agents. Riskier and less secure commercial loans are often refinanced through business capital brokers. Specialized loan brokers that serve to match lenders to borrowers assume a high profile and advertise prominently on the internet.

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