One of the first things investors notice when they look at hard money loan terms is that the numbers look different from conventional financing. Higher interest rates, origination points, and a collection of fees that do not always appear on a bank loan sheet. For a borrower who has only dealt with conventional mortgages, the initial quote can feel like sticker shock.
Thank you for reading this post, don't forget to subscribe!But the numbers make a lot more sense once you understand what each component is, why it exists in private lending, and how to evaluate the total cost of a deal rather than fixating on any single line item. This post breaks down every major cost element in a hard money loan so you can read a term sheet clearly and compare lenders on an apples-to-apples basis.
Points are the most misunderstood cost in private lending, and they come up on almost every hard money term sheet. One point equals one percent of the loan amount. If a lender charges two points on a $300,000 loan, that is $6,000 paid at closing.
Points in hard money lending are primarily origination points, compensation to the lender for underwriting and funding the loan. They are distinct from interest. Interest accrues over time based on how long the loan is outstanding. Points are a one-time cost paid upfront or rolled into the loan balance, depending on the lender and the deal structure.
Private lenders take on transactions that conventional lenders decline. Distressed properties, compressed timelines, transitional assets, borrowers who do not fit the standard income-documentation model, all of these require more hands-on underwriting and carry higher risk than a vanilla conforming mortgage. Points compensate the lender for that additional work and risk, and they are also how lenders who fund a high volume of short-term loans generate revenue when interest accrues for months rather than decades.
In the current private lending market, origination points on hard money loans typically run between 1 and 4 points depending on the loan size, deal complexity, borrower track record, and lender. Smaller loans often carry higher points as a percentage because the fixed costs of underwriting do not scale down proportionally. More experienced borrowers with clean deal histories sometimes negotiate lower points over time with lenders they have worked with repeatedly.
| Quick Math Points vs. Interest. Know Which Matters More for Your Hold TimeOn a short hold, points matter more. If you are borrowing $400,000 for 4 months at 12% interest with 2 points, your interest cost is roughly $16,000 and your points cost is $8,000. Total: $24,000.On a longer hold, interest dominates. The same loan held for 18 months costs $72,000 in interest; points become a smaller fraction of total borrowing cost.The lesson: do not optimize for low points if you are planning a long hold. Optimize for the lowest total cost given your realistic timeline. |
Hard money interest rates are higher than conventional mortgage rates, and that comparison is almost always the first objection a first-time borrower raises. The correct response is to ask what the alternative is. If the deal cannot access conventional financing, because the property is distressed, the timeline is compressed, or the borrower does not fit bank underwriting, then the relevant comparison is not a 30-year mortgage rate. It is whether the cost of the private loan fits within the deal economics.
Most hard money loans carry a fixed monthly interest rate. The annual rate is divided by 12, applied to the outstanding balance each month, and paid as interest-only. That means you are not building equity or paying down principal during the loan term; you are paying for the use of capital while you execute the deal. Principal repayment happens at the exit: the sale, the refinance, or the project completion.
Rates in the private lending market currently range from roughly 9 to 14 percent annually for most deal types, though this varies by market, lender, collateral quality, and borrower profile. Bridge loans and fix-and-flip deals on well-located properties with experienced borrowers tend to land toward the lower end. New borrowers, higher-risk collateral, or rural locations may see rates toward the upper end of that range.
This detail gets missed and it matters. Some lenders calculate interest on a 30/360 basis, each month is treated as exactly 30 days regardless of the calendar. Others calculate on actual days. The difference is small on a single month but can add up over a longer hold. When comparing term sheets, confirm which method each lender uses.
Points and interest are the two biggest cost drivers, but a complete term sheet will include additional fees. Some are standard across the industry, others vary by lender. Knowing what each one covers helps you evaluate whether it is reasonable.
| Fee | What It Covers | Typical Range |
| Origination points | Lender compensation for underwriting and funding | 1 to 4% of loan amount |
| Appraisal or BPO fee | Third-party valuation of the collateral property | $300 to $700+, varies by property type |
| Processing / underwriting fee | Administrative costs of reviewing the loan file | $500 to $1,500 |
| Document prep / legal fee | Preparation of loan documents and closing paperwork | $500 to $1,000+ |
| Draw inspection fee | For construction loans: third-party inspection before each draw | $100 to $300 per draw |
| Extension fee | Cost to extend the loan term beyond the original maturity date | 0.5 to 2 points, varies by lender |
| Prepayment penalty | Some lenders charge if paid off before a minimum period | Varies — not all lenders use this |
| Servicing fee | Monthly fee if loan is serviced by a third party | $25 to $75/month |
Not every lender charges every fee on this list. Some bundle costs into higher points and charge no processing fee. Others keep points low and itemize more fees. The only way to do an accurate comparison is to calculate the total cost to close plus the total carry cost at your expected hold time, not just look at the rate headline.
The number that actually matters is the total cost of borrowing given your specific deal and timeline. Here is a simple framework:
Running this math before you commit to a lender tells you whether the deal works at those terms, and it makes lender comparisons meaningful. A lender with a lower rate but higher fees and stricter extension terms might cost more than a lender with a slightly higher rate and flexible extension options, depending on how long the deal takes.
Every experienced real estate investor has funded deals at hard money rates and come out well ahead. That happens when the deal economics absorb the cost of capital and still produce the target return. It also happens when the alternative is losing the deal or the opportunity entirely.
The question is never whether hard money is cheap. It is whether the return on the project justifies the cost of the financing used to get it done. That is a math problem, not a preference, and once you are comfortable running it, private lending becomes a tool rather than a last resort.
Private Money Capital works with real estate investors across Washington, Idaho, and Montana on fix-and-flip, bridge, construction, and term loans. If you have a deal in front of you and want a clear picture of what the financing would cost, points, rate, fees, and all of it, reach out. No-pressure conversations welcome.
