With hard money loans, the term “points” has several meanings. Some points can lower your interest rate or extend your loan term. Read on to learn more.

The concept of “points” is applied to many types of real estate lending. It can be confusing because it can refer to several concepts involving fees paid to a lender. In almost any context, one “point” usually equals one percent of the loan amount. If you are borrowing $500,000, one point would cost $5,000. What you get in exchange for that amount depends on the kinds of points you are purchasing.

This post describes the different kinds of points you might encounter in hard money lending and how they typically work.

What are “points” on hard money loans?

The term “points” can refer to several things in hard money lending. Depending on the context, it could involve a fee paid at closing or one paid close to the end of the loan term. They could function as a fee paid to the lender for the service of loaning money, or they could be a way to lower a loan’s interest rate or extend a loan’s term.

1. Origination points

Origination points are a fee charged by a lender to cover the costs associated with making a loan. Borrowers typically pay for these points at closing.

While many costs associated with borrowing money are tax-deductible, origination points may present an unusual case. They are deductible for home mortgages and some refinances, but not for many other loans. A tax professional can tell you more about the tax effects of hard money points.

2. Discount points

Discount points are a way to reduce the interest rate on your loan by paying an extra sum upfront. For each point purchased, the interest rate goes down by a specified amount. This can vary among lenders, but it is usually a deduction of 0.125% to 0.25% per point.

For example, a lender might offer up to three discount points on a loan with an interest reduction of 0.2% per point. If you will be borrowing $500,000 at 10%, your options might include the following:

Buying 1 point for $5,000 would reduce your interest rate to 9.8%.
Buying 2 points for $10,000 would reduce the rate to 9.6%.
Buying 3 points for $15,000 would reduce it to 9.4%.

You may also be able to buy partial points. You could buy 1½ points for $7,500 to lower your interest rate by 0.3%.

Not all lenders offer discount points. This includes everyone from home mortgage lenders to hard money lenders. You’ll find that more traditional mortgage lenders offer points that private hard money lenders.

3. Extension points

This type of point is the least common of all of the ones described here. It is uncommon enough that it does not have a widely agreed-upon name.

Buying extension points allows you to extend the maturation date of your loan. Each point you buy can defer that date by a set period of time, which could be anywhere from a week to a month.

As with discount points, not every lender offers extension points. If you think you may need them, ask your lender during the application process. Understand, however, that asking for the availability of extension points before even starting your loan term may not sound great to your lender. It’s like telling them “I’m not confident I can repay this loan in the amount of time we agree upon”.

How many origination points do hard money lenders charge?

Most hard money lenders charge origination points, although the details or ways they describe them may vary. The average number of origination points for a hard money real estate purchase is probably around three or four but this will change according to the economy. As discussed on our “Lending Parameters” page, Capstone Capital Partners charges a minimum of three origination points on most loans.

With regard to discount or extension points, each lender’s offerings are likely to be unique. Three is probably close to the average maximum number of discount points that a lender might offer, but some lenders might not offer any discount points at all. The same goes for extension points.

How to calculate points and interest on a hard money loan

Calculating return on investment is different for each type of point. Origination points are part of the initial loan application, so the main question to ask is whether the loan’s closing costs are financially feasible. For extension points, you might look into how much more you will spend on both points and on extra interest payments. How does that compare to what it would take to pay the loan off by the original maturation date?

Discount points present the most complicated ROI analysis. When deciding whether to purchase discount points or not, you must consider whether paying more upfront is worth the amount you will save on interest over the life of the loan. A reduction of 0.125% to 0.25% might not seem like a large amount, but if you are borrowing a million dollars or more at a fairly high interest rate, it can make a significant difference to your loan payments.

How to calculate return on investment on hard money loans with points

When deciding whether to purchase discount points or not, you must consider whether paying more upfront is worth the amount you will save on interest over the life of the loan. A reduction of 0.125% to 0.25% might not seem like a large amount, but if you are borrowing a million dollars or more at a fairly high interest rate, it can make a significant difference to your loan payments.

For extension points, consider how much more you will spend on points and on extra interest payments. How does that compare to what it would take to pay the loan off by the original maturation date?

Explore your loan options

Capstone Capital Partners is a family-owned and -operated hard money lender with a combined $500M in closed loans over their combined careers. We understand the Texas market through and through. One of the many advantages with working with a private lender like us is flexibility. We’re not hamstrung by regulations, so we’re open to working with our borrowers on points.

Applying is easy. Answer a few questions about your project and we’ll reach out quickly!

Start Your Pre-Approval

What Hard Money "Points" Are & How They Help Investors