Hard money loans have specific cost structures that differ from traditional bank financing. Points and interest are the two main components, and understanding how to calculate each one helps you evaluate deals accurately and avoid surprises.
What Points Mean in Hard Money Lending
Points are upfront fees paid to the lender at closing. Each point equals 1% of the loan amount. If you are borrowing $100,000 and the lender charges 2 points, you owe $2,000 at closing. Points are the lender's way of generating immediate yield on the loan and offsetting the risk of short-term lending.
How Hard Money Interest Rates Work
Interest rates on hard money loans are higher than conventional bank loans, typically ranging from 10% to 15%. The rate reflects the higher risk, shorter loan term, and faster funding that hard money provides. Factors like the deal's risk profile, your experience as an investor, and the loan-to-value ratio all influence the rate you receive.
Calculating Your Point Costs
The formula is simple: Loan Amount x Points (as a decimal) = Point Cost. A $100,000 loan with 2 points costs $2,000 in points ($100,000 x 0.02). Always include this in your total project cost calculation, as it is due at closing and reduces your available capital from day one.
Calculating Monthly Interest
To find your monthly interest payment, use: Loan Amount x Annual Interest Rate / 12 = Monthly Interest. A $100,000 loan at 12% annual interest costs $1,000 per month in interest ($100,000 x 0.12 / 12). This is the amount you owe each month if your loan is structured as interest-only, which most hard money loans are.
Factoring Costs Into Your Exit Strategy
Once you know your point costs and monthly interest, you can project your total borrowing cost over the expected loan term. Add points, total interest, closing costs, and any other fees together. This total tells you the minimum profit margin you need on the deal to make it worth pursuing.
Whether you plan to flip the property or refinance into a long-term loan, your exit strategy should account for every dollar of borrowing cost.
Speed and Flexibility Justify the Cost
Hard money loans cost more than bank financing, but they offer something banks cannot: speed. In competitive markets, closing in days rather than weeks can be the difference between winning a deal and losing it. For many investors, the ability to move fast and close with certainty is worth the premium.
Review Every Term Before Signing
Do not assume all hard money loans are structured the same. Points, rates, payment schedules, and fee structures vary between lenders. Review every term carefully, run the numbers on your specific deal, and confirm that the loan's total cost fits within your investment plan before committing.
