A hard money mortgage is a temporary solution for borrowers who can’t take out traditional loans. Most borrowers don’t want to pay such high interest rates for the full term of their loan. Instead, they set up an “exit strategy” to pay off the hard money mortgage and secure more reasonable financing.

The majority of borrowers pay off their hard money mortgages in six months to three years. Here are the most popular methods of escaping a hard money mortgage:

Exit Strategies for Hard Money Purchase Mortgages

Refinance – Most borrowers using hard money mortgages for home purchases plan to refinance their property with a traditional lender. They may take a couple years to get their credit score and financial life in order. For example: they may get higher paying jobs and establish a history of paying bills on time. Once the borrower is in a better financial situation, he refinances to a lower interest rate.

Flip – Hard money mortgages are also used to flip properties. A borrower invests his own funds to take out a quick hard money loan without meeting traditional bank requirements. After fixing the home, the borrower sells it at a profit. This strategy becomes less profitable when the lender requires a hefty prepayment penalty.

Exit Strategies for Hard Money Second Mortgages

Fund the Sale – Sometimes a homeowner needs to sell his property, but doesn’t have the money to pay the mortgage and keep up with other expenses until a buyer is found. A hard money second mortgage can help him keep afloat until the home is sold.

Fix and Flip – Homeowners can often make more money by improving their property before a sale. A hard money second mortgage gives a borrower the temporary funds to make renovations before putting their home on the market.

Improve and Refinance – Certain credit problems can make taking out a traditional second mortgage impossible. A hard money second mortgage can help borrowers fix their financial issues and refinance at a later date. For example: hard money funds may be used to consolidated higher-interest credit card debt or pay off a delinquent bill.

The high interest on a hard money mortgage can quickly become a financial burden. Before even applying, make sure you have an “exit strategy” planned.