More borrowers tap mortgages of last resort

More and more mortgage seekers spurned by banks and other traditional lenders are turning to high-cost loans known as "hard-money mortgages." Once thought of as a last resort for strapped borrowers, these products — also called "private-money mortgages" — have different lending standards than traditional mortgages and carry higher interest rates and fees.

These days, however, they are attracting a larger, more-affluent group of consumers.

Seattle Funding Group, a Bellevue firm that is one of the largest hard-money lenders on the West Coast, has installed a new phone system in part to handle the calls flooding in from consumers desperate to fund new-home purchases and cash-out refinancings.

"Now that subprime has basically disappeared, the hard-money lenders are pretty much the only source of capital for many people," says Daniel Yeh, a mortgage-industry analyst at the Scotsman Guide, a trade publication based in Bothell.

Hard-money lenders range from individuals and small groups of investors to small firms that get their capital from individual investors who pool their cash in search of higher returns.Here are a few things to know about hard-money mortgages:

• Hard-money lenders protect themselves by requiring borrowers to have substantial equity in their collateral — either a home, investment property or a business — of 30 percent or more.

• Interest rates are generally in the low teens, and fees can be as much as 5 percent of the loan's value.

By comparison, the rates on traditional 30-year fixed-rate mortgages now average around 6 percent, and fees generally top out at 3 percent.

• Though hard-money mortgages can stretch to 30 years, borrowers tend to use them as a short-term tool. Most are paid off within two or three years as borrowers find lower-cost, traditional mortgages to replace the hard-money loan.

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source: seattletimes.nwsource.com