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What are Points on a Hard Money Loan?

Updated: Jan 12, 2022


You have more than likely heard the term “points” if you have ever shopped around for quotes on a loan term for an investment property.


Texas hard money lenders charge points on loans just like the typical traditional lender.



What are Points on a Hard Money Loan?


Hard money lenders typically charge fees to the borrower for providing the loan. These fees are called “points”, also known as origination fees. They’re the lender’s way of making money for extending you their funds.



How are Points calculated?


Points are calculated in relation to the loan amount. Each point equals one percent of the loan amount.


Example:


Loan amount: $100,000

1 point = 1% of the loan amount, or $1,000

2 points = 2% of the loan amount, or $2,000


Points don’t have to be round numbers – you can pay 1.375 points ($1,375), 0.5 points ($500) or even 0.125 points ($125).



Interest Rates & Points for Hard Money Loans


If the borrower wants a lower interest rate, the lender may charge points to offset the rate. Paying points lowers your interest rate relative to the interest rate you could get with a zero-point loan at the same lender. A loan with one point should have a lower interest rate than a loan with zero points, assuming both loans are offered by the same lender and are the same kind of loan.



How many points should you expect to pay?


Points typically range between 2% to 3% of the loan amount depending on the type of loan and terms requested. You can expect to pay between 2-10 points per loan either up front or at closing, depending on your lender. However, it is normally paid upfront.


The number of points depends on various factors:


  • Your past borrowing history with them

  • Your credit score

  • Length of loan term needed

  • Size of the loan

  • The interest rate of the loan

  • The risk or complexity of your loan

  • Your record of success/ experience

  • The lender’s standard operating model

  • The percentage of ARV or LTV being financed



Is paying Points a good idea?


When deciding whether to pay points, note that the longer you plan to have the loan or the property, the more sense it makes to pay as many points as possible upfront. On the other hand, if you need the least expensive possible closing costs, selecting to not pay any points is probably the best way to go.


Paying points at closing can decrease your interest and bring you savings in the long run.



Conclusion


Understanding what are points on a hard money loan is one piece of the puzzle. Note that the two main factors which determine the overall cost of the loan are the interest rate and origination points.


When receiving a quote from a hard money lender the borrower should ask if the points include all fees or if there are any other costs that will be added to the loan. Extra fees such as document fees, processing fees, administration fees, or underwriting fees can significantly increase the cost of the loan for the borrower.


Experienced real estate investors know the need to calculate all their costs going into a deal. This ensures that there is good profit after the sale of their real estate investment.


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