How Hard Money Loans Are Priced: Points, Interest and Fees

A hard money loan is priced through several components, not one rate: interest charged over the term, points paid at closing, third-party and lender fees, and any extension or prepayment charges. To compare offers you add them up over the time you will actually hold the loan.

This guide walks through each line of a typical term sheet and shows how to calculate total cost. We do not quote rates here; pricing depends on the property, the equity, the borrower and the deal. The numbers below are for illustration only.

The components of cost

Interest. Most private loans are interest-only, so the payment each month covers interest and none of the principal. Interest is usually calculated on the amount actually advanced, which matters for construction and rehab loans where funds are released in stages. Our article on interest-only and balloon payments covers the mechanics.

Points. A point is one percent of the loan amount, typically charged at closing. Points are compensation for arranging and funding the loan. They are a one-time cost, which means their effect on your annual cost depends on how long you hold the loan: the shorter the hold, the heavier they weigh.

Fees. Expect third-party costs such as title and escrow, appraisal or valuation, insurance, and recording. Some lenders add processing, underwriting or document fees. Ask for every fee in writing.

Term and extensions. The term is how long you have before the loan is due. If a deal runs late, an extension may be available, sometimes for an extension fee and sometimes with a rate change. Know the terms before you sign, and plan for delays; see exit strategies for a bridge loan.

Prepayment. Some loans carry a minimum interest period or a prepayment charge. If you plan to sell or refinance early, this can change the math.

A worked example (hypothetical)

Suppose you borrow $1,000,000 on an interest-only basis. For illustration, assume the monthly interest charge is $9,000, the lender charges two points, and other closing costs total $8,000. These numbers are hypothetical, not an offer or a quote.

• Points: two points on $1,000,000 is $20,000.
• Other closing costs: $8,000.
• Upfront cost: $28,000.

If you hold the loan for six months:

• Interest: $9,000 times six is $54,000.
• Total cost: $54,000 plus $28,000 is $82,000.

If your project runs long and you hold it for nine months:

• Interest: $9,000 times nine is $81,000.
• Total cost: $81,000 plus $28,000 is $109,000, plus any extension fee.

Notice that the upfront $28,000 is a fixed cost. Dividing total cost by months held gives your real monthly cost of money, and that number falls as the hold lengthens, but the total always rises. That is why a realistic schedule matters more than shaving a fraction off the rate.

Interest reserves and holdbacks

On some loans, part of the proceeds is set aside to pay interest during the term. This is an interest reserve. It reduces the cash you receive at closing, so the net proceeds are lower than the headline loan amount. It is common on construction and renovation loans, where there is no income yet to pay interest. Our article on construction budget, contingency and interest reserve explains how it is sized.

Reading the term sheet

When you receive a term sheet, go line by line and ask:

1. What is the loan amount, and what are the net proceeds after points, fees and reserves?
2. How is interest calculated, and when is it due?
3. What are the points and every other fee, and when are they charged?
4. What is the term, and what does an extension cost?
5. Is there a minimum interest or prepayment charge?
6. What conditions must be met before funding?

Then build your own total-cost table for the early, expected and late scenarios. If the deal still works in the late scenario, the pricing is something you can live with. If it only works when everything goes perfectly, the problem is the plan, not the lender.

Why pricing differs between loans

Private lenders price risk. Factors that can move pricing include how much equity cushions the loan, the property type and condition, how clear the exit is, and the complexity of the file. A strong equity position and a credible takeout generally support better terms than a thin-equity deal with an uncertain exit. For how we evaluate those factors, see what private lenders look at when underwriting.

Do not compare in isolation

A cheaper-looking loan that fails to close, or closes late, can cost more than a pricier loan that funds on time. Compare certainty of closing, funding conditions and the lender's track record alongside the price. This article is general information, not advice on your specific deal.

To see how your scenario would be structured, call (800) 943-1314 or submit your file. Funding in as little as seven days is possible, subject to a complete file, underwriting, title review and property valuation.