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The Difference Between Interest on the Total Loan Amount and the Funded Balance.
What’s the difference between interest on the total loan amount and interest on the funded balance? Most real estate investors use private lenders but be aware that not all lenders are created equal. Make sure you know what your interest rate is comprised of.
Let’s look at this example scenario to explain…
So, you have received two loan proposals from two different lenders and want to decide which loan to go with. One loan proposal is at a 9.25% interest rate and the other is at 9.50%. If all other loan terms look the same (same loan fee, same loan term, same doc fee, etc.), the loan proposal with the lower interest rate is obviously going to be cheaper so you have to go with that lender, right? Not necessarily, there may be more to that interest rate than meets the eye.
If the loan you need includes the future funding of holdbacks (future draws to reimburse you for rehab costs), what you really need to know is how interest is calculated. Does the lender charge interest on the total amount of the loan or on the funded balance?
Assume you need a $1,000,000 loan that includes $250,000 in holdbacks ($750,000 funded at close plus $50,000 funded every month for five months). For comparison purposes, each lender funds the same amounts on the same dates, the only difference is that Lender A charges 9.5% interest on the loan balance as they fund and Lender B charges 9.25% interest on the full $1,000,000 total loan amount from day-one.
Over the same 12 months, the total interest cost for Loan A comes to approximately $89,000 and the total interest cost for Loan B comes to $92,500. That loan from Lender B with the 0.25% lower interest rate will actually cost you about $3,500 (3.9%) more than Lender A. Although there are many reasons why Lender B may charge interest on the total loan amount, the primary reason is likely that they have to because they are brokering your loan to others and not lending out their own money. If the so-called Lender plans to sell your loan to someone else, or worse yet, plans to sell fractional portions of your loan to several different lenders, they may be required to charge interest on the total loan amount.
Pivotal Capital Group is a true direct lender with our own capital to lend for your real estate project and we never sell our loans to third-parties. We are focused on creating long-term