If you’re looking for a quick and easy way to get funding for your business or real estate project, a hard money loan may be the right option for you. You might be asking, “what are points on a hard money loan?” These loans are funded by private investors, rather than banks, and they come with a variety of terms and conditions. One important factor to consider when getting a hard money loan is the cost of points. Points are fees that are paid to the lender at closing, and they can add up quickly.
In this article, we’ll discuss what points are, how many points you should pay on a hard money loan and more.
Key Takeaways
- Hard money loans are short-term loans that are typically used by real estate investors.
- The amount of points you pay on a hard money loan will vary depending on the lender, but is usually around two to five percent of the total loan amount.
- You may be able to negotiate the number of points you pay with your lender.
- Hard money loans can be a good strategy for borrowers who need fast access to capital or have bad credit. However, they’re not right for everyone because of the high cost.
What Are Points on a Hard Money Loan?
When you get a hard money loan, you’ll typically have to pay points. These are fees that the lender charges in order to finance your loan. The amount of points you pay will vary depending on the lender. It’s usually around two to 5 percent of the total loan amount. Points will likely be required on all kinds of hard money loans including fix and flip loans, BRRR method loans and more.
In other words, if you’re borrowing $100,000, you can expect to pay $2000 to $5000 in points. While this may seem like a lot of money, keep in mind that hard money loans are typically short-term loans. They also don’t require nearly as much paperwork as a traditional loan.
How Many Points Should You Pay on a Hard Money Loan?
The number of points you pay on a hard money loan will depend on a few factors.
- First, it depends on the interest rate. Sometimes you can pay fewer points if you accept a higher interest rate. This is not always the case and will mostly depend on your lender.
- Second, it depends on how long you plan on borrowing the money. If you only need the loan for a short period of time, you may be able to get away with paying fewer points.
- Next, a better credit score or more experience may affect the number of points you have to pay.
- Finally, it depends on your negotiating skills. If you’re able to negotiate with the lender, you may be able to get them to lower the number of points they charge.
In general, you should expect to pay two to five points on a hard money loan. However, this may vary depending on your individual circumstances.
Are Hard Money Loans a Good Strategy?
Before you decide to take out a hard money loan, it’s important to weigh the pros and cons.
Pros
- Hard money loans can be a good strategy for borrowers who need fast access to capital or have bad credit.
- They’re also a good option for real estate investors who want to purchase property quickly.
Cons
- The biggest downside to hard money loans is the cost. Points can add up quickly, and you’ll usually have to pay a higher interest rate than with a traditional loan.
- It’s also important to remember that hard money loans are short-term loans. If you need more time to pay back the loan, you may incur additional fees.
Before you decide to take out a hard money loan, make sure you weigh the pros and cons and discuss your options with a lender. Hard money loans can be a good option in certain situations, but they’re not right for everyone.
FAQs on Points on a Hard Money Loan
How is interest calculated on a hard money loan?
In most cases, hard money loans charge a higher interest rate than traditional loans. This is because they’re considered to be more risky for the lender. Most lenders charge interest on a monthly basis.
Can I get a hard money loan with bad credit?
It’s possible to get a hard money loan with bad credit. However, it will be more difficult and you may have to pay more points.
What is the minimum credit score for a hard money loan?
There is no set minimum credit score for a hard money loan. Most lenderrs will want to see credit scores above 600 at a minimum. However, the higher your credit score, the lower the interest rate you’ll likely be able to get.
Can I prepay my hard money loan?
Yes, you can prepay your hard money loan at any time. However, keep in mind that you may have to pay a penalty for doing so. Most hard money lenders also charge a minimum interest fee regardless of how quickly you pay off the loan.