How to Calculate Interest on Your Hard Money Loan (Part I)

Whether you’re new to real estate or you’re an experienced investor, it’s important to understand how to calculate interest payments on a hard money loan if you want to successfully manage your finances and achieve your investment goals.

Types of Loans

First, it’s important to know that there are two popular types of loans for investors: amortized and interest-only.

Generally speaking, amortized loans are paid down over time and require you to make monthly payments towards both the principal balance as well as the interest accruing on the loan. This is how most conventional loans are structured.

On the other hand, interest-only loans are typically paid back all at once (upon selling or refinancing a property) and, as their name suggests, only require you to make monthly payments towards the interest you’re being charged. This is how most hard money loans are structured.

Because most hard money loans are interest-only, that’s what we are going to focus on in this blog post.

Calculating Interest on a Hard Money Loan

At a high level, calculating the interest payment on an interest-only hard money loan is pretty straightforward. You’ll simply need:

1. The Loan Amount (Principal)
2. The Annual Interest Rate (Annual Percentage Rate or APR)
3. 12 (the number of months in a year)

Once you have those three things, the formula to calculate your monthly interest payment on an interest-only loan will be:

Loan Amount x (Annual Interest Rate / 12) = Monthly Interest Payment

For sake of example, let’s say you borrow $100,000 from a hard money lender who charges an annual interest rate of 12%. To calculate your monthly interest payment you would simply plug these figures into the formula above, which would look like this:

$100,000 x (12% / 12) = $1,000

So, your monthly interest payment on a $100,000 hard money loan with an interest rate of 12% would be $1,000.

Simple enough, right?

Final Steps

As I mentioned earlier, this is only a high level view of how to calculate your monthly interest payments when you borrow money from a hard money lender. Most hard money lenders (whether they tell you or not) will go into more detail to calculate and schedule your interest payments to ensure they account for the entire duration of the loan.

However, you don’t have to take their word for it. Check out the second post in this series where I explain exactly how hard money lenders (including Sharper Capital Partners) calculate their clients’ interest payments.

The more educated you are about the tools you have available to you as an investor, the better prepared you’ll be to take down deals and scale your portfolio.

Join the Sharper Capital Newsletter for FREE to get access to the following educational resources:

• Sharper Capital Partners 24-hour Project Approval Checklist
• Our guide on How to Analyze a Fix-and-Flip
• Our guide on How to Get No Money Down Financing
• The Pros and Cons of Using Hard Money Lenders
• Access to new releases of the Hard Money Podcast

Note: For those of you who are just starting, the reason you divide the annual interest payment by 12 (the number of months in a year) is because if you want to find out how much interest you will pay each month then you have to figure out how much interest you will be charged on a monthly basis. Therefore, you break down the 12% annual interest into 1% monthly interest (12% / 12 months = 1%) and so another way of looking at the example above is: $100,000 x 1% = $1,000.