If you’re considering a private mortgage or a second mortgage, it’s crucial to understand how the interest rates and fees differ from those of traditional lenders. Both private and second mortgages typically come with higher rates due to the additional risk that the lender is absorbing and additional fees compared to bank mortgages, making it crucial to know what you’re getting into before committing. It’s important to know that private lenders do not pay compensation as traditional lenders do so a mortgage broker will need to charge a fee to be compensated for the time spent in securing a private mortgage.

Our previous blogs covered What is a Private Mortgage? and How to Get Approved for a Private Mortgage, providing insight into how private lenders operate. Today, we’ll break down the key details about private mortgage rates and fees to help you decide whether you’re considering a private first mortgage or a second mortgage.

What Are Private Mortgage Rates?

Private mortgage rates are the interest rates you’ll pay on your private loan. Unlike traditional lenders, such as banks and credit unions, private lenders typically offer higher interest rates due to the nature of private mortgages.

Here’s what you need to know about these rates:

• Higher than traditional mortgage rates: Private mortgage rates are generally higher than those offered by banks. While traditional mortgage rates usually range from 3% to 5%, private mortgage rates start around 4.99% and can go up to 15%, depending on your financial situation and the lender.
• Risk-based pricing: Private lenders price their mortgages based on risk. You’ll likely face a higher interest rate if you have bad credit, irregular income, or other factors that make your financial situation riskier.
• Short-term focus: Most private mortgages are short-term loans, typically six months to 3 years. This short-term nature often results in higher interest rates than banks’ longer-term mortgages.

How Do Private Mortgage Fees Work?

Private mortgage fees differ from traditional lender fees, and it’s important to understand the costs involved. Here are the most common fees you’ll encounter when taking out a private mortgage:

• Lender fees: Private lenders usually charge a lender fee, which can range from 1% to 2% of the mortgage amount for a first mortgage and from 1.50% to 4% on a second mortgage, based on a minimum fee to compensate for the time spent on the file. This fee compensates the lender for the higher risk they are taking.
• Broker fees: Mortgage brokers are crucial in connecting you with private lenders. Since private lenders don’t pay brokers directly, you’ll typically be responsible for a broker fee, which may also range from 1% to 4% of the mortgage amount.
• Legal fees: In addition to the lender’s legal fees, you’ll need to hire a lawyer to provide Independent Legal Advice (ILA), which is required in private mortgage transactions. You, as the borrower, will need to cover both your legal fees and the lender’s legal fees.
• Appraisal fees: A property appraisal is mandatory, and you’ll need to cover the cost of hiring an appraiser on the private lender’s approved list. Appraisals help determine the current market value of your home.
• Administrative or setup fees: Some private lenders may charge additional administrative fees to cover processing costs or setting up your mortgage. This is usually a flat fee and will be outlined in the agreement.

What Impacts Your Private Mortgage Rates and Fees?

Several factors affect your interest rate and fees for a private mortgage. Here’s what you should consider:

1. Equity in your home: The more you have, the lower your rate will likely be. Private lenders are more comfortable offering lower rates when they feel their investment is secure through your property’s equity. Typically, you’ll need at least 20% equity to qualify for a private mortgage.
2. Credit score: While private lenders are more flexible with credit scores than banks, your credit score still plays a role in determining the interest rate. You may be offered a higher interest rate if your credit score is low.
3. Income verification: Although private lenders don’t have the same strict income verification requirements as traditional lenders, many now ask for all applicants’ income documents. Providing proof of income could help you secure a better interest rate.
4. Property type and location: The location and condition of your property matter. Homes in urban areas or higher-value properties are seen as less risky, which could result in lower rates.
5. Loan-to-value ratio (LTV): Private lenders assess the loan-to-value ratio of your property. A lower LTV ratio means you have more equity, which translates to less risk for the lender and potentially lower rates.

Why Are Private Mortgage Rates Higher?

The key reason private mortgage rates are higher than traditional mortgages is the level of risk that private lenders take on. Traditional lenders, such as banks, are heavily regulated and require strict credit checks, income verification, and stress tests to ensure borrowers meet their financial obligations.

Private lenders, on the other hand, focus primarily on the equity in your home rather than your income or credit score. While this provides more flexibility and access to financing for borrowers who may not qualify through traditional means, it also means that lenders are taking on more risk—hence the higher rates and fees.

Is a Private Mortgage Worth It?

Everyone’s circumstances are different, but a second mortgage might be an idea if you are in the second year of a 5-year fixed rate mortgage and need to consolidate fifty thousand debt that you have accumulated on your credit card with a monthly payment of $1500,00. At 12% interest (a standard second mortgage rate), you would be paying $500.00 a month, which would increase your cash flow by $900.00 a month and save you thousands of dollars if you were to break the mortgage to consolidate your existing mortgage and the credit card debt.

Private mortgages offer a flexible and fast solution for those who may not meet the strict requirements of traditional lenders. A private mortgage can be a lifesaver if you have bad credit, are self-employed, or need fast access to funds. However, the higher interest rates and fees mean that private mortgages are typically used as a short-term solution.

You should consider a private mortgage if:

• You need fast approval and can’t wait for the lengthy approval process of traditional lenders.
• You have bad credit or non-traditional income, making qualifying for a bank mortgage difficult.
• You’re purchasing an unconventional property that a traditional lender won’t approve.
• You’re comfortable with refinancing or transitioning to a traditional mortgage when the private mortgage term ends.

Next Steps: Get Approved for a Private Mortgage Today

If you’re ready to move forward with a private mortgage, Sunlite Mortgage can help. Our private mortgage experts will guide you through the process, ensuring you understand the rates, fees, and terms, so there are no surprises. We specialize in fast approvals and flexible terms based on the equity in your home—not your credit score or income.

Ready to get started?
Talk to a private mortgage expert today for a no-obligation consultation, or apply online for a private mortgage today. We can help you get approved in as little as 24 hours!