Hard money loans have two main cost components: points paid at closing and interest that accrues over the loan term. Knowing how to calculate both gives you a clear picture of your total borrowing costs before you commit to a deal.
What Are Points?
Points are prepaid fees charged by the lender at closing. One point equals 1% of the loan amount. If you borrow $100,000 and the lender charges 3 points, you pay $3,000 upfront. This is separate from the interest rate and is typically due at closing.
How Interest Rates Are Determined
Hard money loan interest rates depend on several factors: the risk profile of the deal, the loan-to-value (LTV) ratio, and the borrower's experience. Rates typically range from 7% to 15%. These rates are higher than conventional mortgages because the lender is taking on more risk and providing faster funding.
Calculating Monthly Interest Payments
The formula is straightforward: Loan Amount x Annual Interest Rate / 12 = Monthly Interest Payment. On a $100,000 loan at 10% annual interest, your monthly interest payment is approximately $833. Some lenders require monthly payments, while others collect all interest as a lump sum at the end of the term. Confirm the payment structure before closing.
Points vs. Interest Rate Trade-Off
In general, paying more points upfront results in a lower interest rate. This benefits the lender by providing immediate cash flow and reducing their risk. For you as the borrower, the question is whether the lower rate saves more money over the loan term than the extra points cost at closing. On short-term loans, the math often favors fewer points.
Interest-Only Structure With Balloon Payment
Most hard money loans are interest-only, meaning your monthly payments cover only interest, not principal. The full principal is due as a balloon payment at the end of the loan term. This structure keeps monthly costs low during the project, which is ideal for fix-and-flip investors who plan to sell before the term ends.
Total Cost of Borrowing
To get a complete picture, add up all costs: points, total interest over the loan term, closing costs, and any additional lender fees. This total cost of borrowing is what matters when evaluating whether a deal is profitable. Always compare the total cost against your projected return to confirm the numbers work.
Run the Numbers Before You Commit
Understanding points and interest is more than math. It is part of strategic financial planning. Discuss the details with your lender, calculate your total costs, and make sure the hard money loan structure supports your investment goals before signing.
