If you have ever compared two private loan offers and felt the numbers did not line up, points are usually the reason. They are one of the most common line items in private and hard money lending, and one of the most commonly misread. This guide explains in general terms what points are, how they differ from the interest rate, how to think about the full cost of capital when you plan to hold a property for months rather than years, and which questions to put to any lender before you commit. It is general education, not a statement about any lender's terms.
What a point actually is
A point is an origination fee equal to one percent of the loan amount. Two points on a loan means a fee of two percent of the principal. The fee pays for the lender's work in underwriting, documenting and funding the loan, and it is typically collected at closing, either deducted from the proceeds or paid in cash alongside the other closing costs.
Because points are charged on the loan amount rather than on the property value or on your own cash in the deal, a larger loan carries a larger fee in dollars even when the percentage is identical. That is worth remembering when you compare a smaller loan with a larger one.
Points versus the interest rate
The interest rate is the price of using the money over time. It accrues for as long as the loan is outstanding, so the dollars you pay grow with the number of months you hold the loan. Points work differently. They are a one-time charge, set at closing, and they do not shrink if you repay early.
That difference matters most on short holds. A fixed fee spread over a twelve month loan weighs more per month than the same fee spread over a thirty year mortgage, which is why borrowers who are used to long-term financing sometimes underestimate how much a point can matter on a short-term business purpose loan.
A simple example of total cost
Here is an illustration with round figures. This is an example only and is not a statement about the terms of any lender, including us. Suppose an investor borrows $200,000 for a six month hold. Imagine one offer with a stated interest rate of 10 percent and 2 points, and another with a stated rate of 11 percent and 1 point.
In the first offer, 2 points is $4,000 at closing. Six months of interest at 10 percent on $200,000 is about $10,000, so the total financing cost is roughly $14,000. In the second offer, 1 point is $2,000, and six months of interest at 11 percent is about $11,000, for roughly $13,000 in total. The offer with the lower stated rate is not the cheaper loan over this hold.
Now stretch the same comparison to eighteen months. Interest on the first offer rises to about $30,000 and on the second to about $33,000, so the totals become roughly $34,000 and $35,000. The ranking can change with the timeline, which is exactly why the length of your hold belongs in the calculation.
Thinking about total cost of capital
Total cost of capital is everything you pay to use the money, measured against how long you use it. A practical way to compare offers is to add every lender charge, then add the interest you expect to pay over your realistic timeline, and compare the totals in dollars. You can also divide the total by the loan amount to see an all-in percentage.
Build your estimate from a conservative timeline, not an optimistic one. Renovations run long, permits take time and resale takes time. Compare the offers at your expected hold and again at a longer one, so you know how sensitive each is to delay.
Finally, set the financing cost against the whole business plan. A fee is only one input. What matters is whether the projected return on the project still clears your target after every cost of capital is counted.
- Points, as a dollar amount at closing
- Other lender charges listed on the term sheet
- Interest over your expected hold, and over a longer one
- Any extension or exit costs
- Third party costs such as title, appraisal and legal
Questions to ask any lender
Clear questions get clear answers, and a transparent lender will welcome them. Before you sign, ask for the full cost in writing and walk through each line.
- How many points are charged, and on what amount: the full loan, or only the funded portion?
- Are points paid at closing, or rolled into the loan balance?
- What other lender fees apply, and which are third party pass-throughs?
- Is interest calculated on the full commitment or only on funds drawn?
- Is there a minimum interest period if I repay early?
- What does an extension cost if my timeline slips?
- Can I see an itemized estimate of total cost for my expected hold?
Keep the comparison honest
Points and rate are two levers a lender can use to build the same economics in different shapes. Neither is good or bad on its own. What counts is the total you pay over the time you hold the loan, and whether your project still works after it.
Run the numbers at more than one timeline, ask for everything in writing, and compare offers on dollars rather than on headline percentages. If anything on a term sheet is unclear, ask until it is.
Common questions
Are points the same as the interest rate?
No. Points are a one-time fee charged at closing as a percentage of the loan amount. The interest rate is a recurring cost that accrues for as long as the loan is outstanding.
Do points get refunded if I repay early?
This depends on the loan documents. Many origination fees are earned at closing and are not refundable, so ask the lender directly and get the answer in writing.
Is a lower interest rate always the cheaper loan?
Not always. On a short hold, upfront points can outweigh a small difference in rate, so compare the total dollars over your expected timeline.
Can points be negotiated?
Terms vary by lender and by deal. It is reasonable to ask what drives the structure and to compare more than one offer, but no outcome can be assumed.