The Advantage of Lower LTV Loans
Due to the regular ups and
downs that business owners sometimes experience, obtaining conventional
financing for their capital needs is not always an option, and businesses will
then turn to private or hard-money lenders for their financing. Although
this route is more expensive than conventional financing, there are ways
that borrowers can reduce the costs associated with hard money loans, and come
out on top as a result.
One of the most overlooked
ways to reduce the costs associated with private money loans is to voluntarily
limit the amount of equity business owners borrow against their properties.
Lower loan amounts automatically reduce the lifetime cost of the capital
borrowed, but they may provide savings in other ways as well.
Private money lenders tend to
price their product’s fees and interest rates according to the risks associated
with the loan. A loan that is using more of a property’s equity is
riskier, and will typically be priced accordingly. Because lower
loan-to-value (LTV) loans present less of a risk to the lender, they will
usually be more competitively priced.
Having a lower LTV loan can
also increase the number of loan options available to a business. Not all
lenders are comfortable making higher LTV loans, so high LTV borrowers have
limited loan options to choose from. Having access to a wider market of
loan choices thus generally improves the borrower’s chances of finding a less
expensive loan, often with features that help them achieve their financial
Lenders considering lower LTV
loans may waive certain requirements, such as income and debt service
documentation, that can further complicate the process of closing a loan.
In cases where such documentation is still required, the lender may be more
lenient on the requirements than they would be on a higher LTV loan. In
addition, lenders may also extend longer loan terms on low LTV loans, thus
alleviating both the borrower’s need to secure additional or replacement
financing sooner, and/or the need to capitalize new fees and points into their
There are of course sometimes
business circumstances that require a borrower to maximize the amount of equity
they are taking out of their property, and hard money loans in such cases can
certainly be useful. Before you go that route, however, take a good hard
look at your business plan, and evaluate whether you can’t make do with a lower
LTV loan. The savings you might realize through this strategy may
actually be far more significant to you in the long-run.