What are Mortgage Points?
Mortgage points (or simply "points") are fees paid to a lender at closing, calculated as a percentage of the loan amount. One point equals 1% of the loan. On a $300,000 mortgage, one point costs $3,000. There are two types of points: origination points (the lender's processing fee) and discount points (prepaid interest to reduce the rate).
In the context of hard money lending, points always refer to origination fees charged by the lender for making the loan. Hard money lenders typically charge 1-3 points at closing in addition to the interest rate. A hard money loan at 12% interest with 2 points on a $200,000 loan means $4,000 in upfront fees plus monthly interest payments.
How discount points reduce your rate
Each discount point typically reduces the interest rate by 0.25% (though this varies by lender and market conditions). Paying one point to drop from 7% to 6.75% on a $300,000 loan costs $3,000 upfront but saves approximately $50 per month. The break-even point is 60 months (5 years). If you plan to hold the property longer than 5 years, buying the point saves money over the loan's life.
When points make sense
Points make financial sense when you plan to hold the property longer than the break-even period, you have excess capital at closing, and the rate reduction meaningfully improves your cash-on-cash return. Points generally do not make sense for flip investors who hold properties for months, not years. The upfront cost is not recovered in the short holding period.
Points as closing costs for investors
Hard money points are one of the largest closing costs for leveraged investors. On a $200,000 loan with 2 points, that is $4,000 before the first month's interest payment. Factor points into your MAO calculation. Some hard money lenders offer lower points with higher rates or vice versa. Run the total cost comparison based on your expected holding period to determine the cheapest option.