As it becomes increasingly difficult to borrow for a refinance from traditional banks, more and more consumers are turning to private lenders. While this strategy usually costs more, it involves fewer hassles and more assurances that loans will go through without delays.

With the traditional mortgage market in turmoil, many consumers who need a mortgage or refinance existing debt are turning to the private loan arena. Private lenders stepped up to the plate earlier this year to help distressed homeowners refinance when the market for jumbo loans dried up and left many jumbo note holders desperate for options. What's more, many businesses are now looking to private lenders for their commercial loans. The reason for this is that today's economy offers a great opportunity to buy property or hire construction companies at a discounted price. Banks are tightening their purse strings and making fewer business loans, creating a larger niche for private lenders to fill.

Higher rates, faster service

Private lenders usually charge higher rates, but they can afford to because they're typically the money source of last resort. Sometimes, a borrower needs money fast in order to capitalize on a buying opportunity or complete a project on time, but conventional lenders can take up to two months to close a loan transaction. A private lender might get the same deal done within a matter of days, as long as the customer is willing to pay a premium and a hefty down payment.

An expanding market

Last year, the market for subprimes evaporated. This year, Fannie Mae will stop trading in Alt-A loans, which are one category above subprimes. This means that conventional lenders are phasing out all such loans specifically designed to help borrowers who have either poor credit, or trouble documenting income and assets. Those who normally use such loans to buy or refinance will have no choice but to turn to private lenders for help.

One of the problems for the average consumer, however, is that private loans are structured much differently than the loans that most Americans are accustomed to. A typical private loan, for example, might have a repayment life of only five to 10 years, so these loans usually need to be paid off or refinanced at a faster clip. Of course, for people planning to sell a home within a two to three year time frame, that's no problem. And for borrowers who need money for something like a home improvement project that will last just a few months, a private loan repaid in less than a year might be ideal.

Private mortgages typically charge rates of interest so high that they don't make much financial sense for the average homeowner wanting to refinance to save money in today's economic environment. But if large investors continue to pour money into the private loan sector, it will add liquidity and help to generate healthy competition. That always leads to better pricing and could ultimately benefit mortgage refinance borrowers across the board.

Published on September 5, 2008