
Points on a hard money loans
In real estate investing, it’s vital to understand the origination fees on hard money loans from private lenders. By calculating these fees, real estate investors can better assess each property’s true cost and profit before investing.
What are hard money loans?
Hard money lending is real estate loans from companies or private investors. It focuses on the mortgage property value, not the borrower’s credit scores.
What are the Points Of Hard Money Loans?
In real estate finance, “points” are fees paid directly to a lender at the closing of a loan. Think of it like this: you’re prepaying some of your interest to get a lower rate overall.
Each point equals one percent of the loan amount; for example, if you’re getting a $100,000 loan, one point would cost you $1,000. Paying points can cut your monthly payments, saving you funds over the life of the loan.
Types of Points in Hard Money Loans
Origination Points:
Definition: These are upfront fees that lenders charge for processing the loan, including covering admin, underwriting costs, document preparation, etc…
Typical range: Origination points may range from 1% to 5% (2 to 3 points on average) of the total loan amount.
Example: For a $200,000 loan with 3 origination points, the fee would be $6,000 (3% of $200,000).
Discount Points:
Definition: Discount points in hard money loans are a way to “buy down” your interest rate. Essentially, you pay an upfront fee to the lender in exchange for a lower interest rate on your loan. Each discount point equals 1% of the total loan amount.
Example: Let’s say you’re getting a $200,000 hard money loan with an interest rate of 10%. The lender offers you the option to buy two discount points.
Cost of points: 2 points = 2% of $200,000 = $4,000 upfront cost.
If each point lowers the rate by 0.25%, your new interest rate would be 9.5%. That’s 10% minus 0.5%. Note this is an example. Point reductions can change based on the loan provider.
The Benefit of Upfront Points in Real Estate Investment
Lower Interest Rate: Paying points means a lower interest rate. This can save you a lot over the life of the loan, especially with longer loans.
Lower Monthly Payments: A lower interest rate leads to smaller monthly payments. This gives you more cash for other investments or expenses.
Short-Term Loans (like fix-and-flip loans):
Reduce your monthly payments, freeing up cash for renovations or new investments. Imagine completing your fix and flip faster and moving on to the next project sooner!
Long-Term Loans (like rental property loans):
Slash your total interest costs over the life of the loan, maximizing your returns. This is particularly impactful for larger loans and longer loan terms.
For example, on a $300,000 loan, a single point could save tens of thousands over 30 years!
Construction Loans:
Minimize interest during the building phase. This helps you stay on budget and may boost your profit margin when you finish projects.
Factors Influencing Points on Hard Money Loans
1. Mastering the Art of Negotiation
To get the best deal on a loan, you must understand the needs and wants of the lender. After that, find a solution that works for both.
Hard money loans are more flexible than traditional ones. This means borrowers can negotiate how many points they pay.
Your negotiating power depends on several factors, such as credit score, LTV, loan term, and relationship with the lender. A solid financial history can give you an advantage in negotiations.
Understanding the factors that influence points on hard money loans is essential for getting the best deal. Now, look at the specific requirements you’ll need to meet to secure a hard money loan.
2. Calculating Your Optimal Points Strategy
Use an amortization calculator or a spreadsheet to determine if paying points is worth it. These tools help you compare the total cost of the loan with and without points.
You can check if the interest savings from buying points is greater than the points’ upfront cost. Basically, it helps you find the point where you start saving money.
Amortization Calculators:
These tools let you enter the loan amount, interest rate, loan term, and points. Then, you can see how your monthly payment and total interest paid change.
Spreadsheets:
Make a spreadsheet to model various point scenarios. Compare the total loan cost. This includes upfront points and the total interest paid over time.
Example:
Let’s say you’re considering a $100,000 hard money loan with a 12% interest rate and a 2-year term. The lender offers you the option to pay 2 points to reduce the interest rate to 11%.
Scenario 1: No Points – Your monthly payment would be higher, but you have no upfront point costs.
Scenario 2: 2 Points – Your monthly payment would be lower, but you’ll need an extra $2,000 (2% of $100,000) at closing.
Frequently Asked Questions
How can I improve my chances of getting approved for a hard money loan with favorable terms?
A clear investment strategy, a detailed project plan, and a strong exit strategy can boost your approval chances.
What are the risks of using hard money loans for real estate investments?
If an investment project takes longer than expected, it can be problematic. High fees, interest rates, and short repayment terms can hurt real estate investors.
Are there any restrictions on the types of properties that can be financed with hard money loans?
Hard money lenders are usually more flexible. However, they may restrict certain property types. This includes properties in very poor condition in certain areas.
Can I use hard money loans for purposes other than fix-and-flips and rental properties?
Depending on the lender’s guidelines, hard money loans can fund various real estate strategies. These include wholesaling, commercial properties, and land development.
Are closing costs on hard money loans tax-deductible?
Some closing costs, like loan origination fees and discount points, may be tax deductible for investment properties.

Sandy Yuen is a certified mortgage broker. In 20 years of hard money lending, she’s funded over $450 million for investors. She specializes in fix-and-flip, bridge, and construction loans.
She also funds projects like second homes, apartments, and commercial and shopping centers. Sandy, a trusted lender, served over 500 clients in Irvine, CA. She is known for her fast approvals, flexible rates, and high transparency.
Share This Story!
Local & National
While we are based in Southern California, our reach is national. For the exception of a few states, we have funded loans all across America in some of the largest and most active metropolitan areas.
We have also worked with clients ranging from local, national, to global, helping them secure the right loan for their project.
Ready to Start?
Let’s being the process with a complimentary consultation. As we specialize in custom hard money loan solutions for our clients, we want to better understand your specific needs in order to offer you the best program available.
Please fill our inquiry form to get the process started!