Points on Hard Money Loans
Points on a hard money loan are upfront fees charged by the lender at closing, calculated as a percentage of the loan amount. One point equals 1% of the loan. If you borrow $200,000 with 2 points, you pay $4,000 in origination fees at closing. Points are in addition to the interest rate and are a significant component of the total borrowing cost.
Why hard money lenders charge points
Points compensate the lender for the risk and administrative cost of short-term loans. Hard money loans are typically held for 6-12 months, so the lender earns less total interest than on a 30-year mortgage. Points provide upfront revenue that makes short-term lending profitable. Higher-risk deals (higher LTV, lower borrower experience) typically carry more points.
How points affect your deal
Points are a direct reduction of your profit. On a 6-month flip with a $200,000 hard money loan at 12% interest and 2 points: Interest cost = $200,000 x 12% x 6/12 = $12,000. Points = $200,000 x 2% = $4,000. Total borrowing cost = $16,000. The points add 33% to your financing costs in this example.
Comparing hard money offers
When comparing hard money lenders, look at the total cost (interest + points) over your expected hold period, not just the rate or points in isolation. A loan at 10% with 3 points held for 6 months costs more than 12% with 1 point for the same period. Calculate the total dollar cost for each offer using your actual timeline.
Negotiating points
Points are negotiable, especially for repeat borrowers with a track record of successful projects. Some lenders offer lower points for faster closings, lower LTV, or when you bring them multiple deals. Building a relationship with a hard money lender over several successful projects typically results in better terms over time.