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Blog | LYNK Capital

Are Loan Rates Always Comparable?

Posted on July 29, 2016

Think comparing rehab and construction loan rates is easy? Think again!

With these kinds of loans, the methods that some lenders use to calculate your monthly payment can cause you to pay thousands of dollars more in interest over the life of your project, even compared to a loan with the exact same interest rate.

How does this happen?

When you close on a loan with a rehab or construction component, the amount of your construction budget will be held by the lender to be paid out in the future when work is complete. Here's where the difference occurs - many lenders will base your monthly interest payment on your total loan amount, including the construction funds that haven't yet been paid to you. You're effectively paying interest on money that you haven't yet borrowed.

LYNK Capital's Better Approach

At LYNK Capital, we take a different approach and base your monthly payment only on the amounts that you've actually borrowed each month. We believe this is the fairest approach to lending and is a great way for borrowers to save money.

To demonstrate the difference, let's look at an example - for this, we'll use a $200,000 loan with a 12.0% interest rate, a six-month term, and an $80,000 construction budget to be used over four months.  As you can see below, the difference in the amount of interest paid is significant.  The borrower who is charged interest on the full loan amount will pay $2,000 more to their lender - even though the rate on the loan was exactly the same!

  LYNK Capital Competitor
Month Balance Payment Balance Payment
1  $120,000  $1,200  $200,000  $2,000
2  $140,000  $1,400  $200,000  $2,000
3  $160,000  $1,600  $200,000  $2,000
4  $180,000  $1,800  $200,000  $2,000
5  $200,000  $2,000  $200,000  $2,000
6  $200,000  $2,000  $200,000  $2,000
  Total Paid:  $10,000 Total Paid:  $12,000

 

To put things another way, the competitor above would have had to offer a rate of 10% just to match the total cost of the loan from LYNK Capital at 12%.

Know Before you Borrow!

While this difference may not be obvious at first glance, it's important for investors and flippers to fully understand how interest will be calculated under their loan, and underscores the importance of factoring in all the costs of borrowing when selecting a lender.

At LYNK Capital, we believe in treating our borrowers fairly, and this is just another way that we strive to make the lending process fast, personal, and easy.

Want to know more?

Click Here to learn more about LYNK Capital's rehab and construction lending programs.

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