For investors looking for short-term funding, hard money loans—also known as private money—are essential.
Investors work hard to source and get a property under contract. Then they need to acquire financing. Investors might have cash on hand for a down payment and for the other fees associated with paying off the seller, but they’ll need another party for help to fill the gap in their funding.
This is where hard money lending comes into play. Hard money lenders fill an essential role in real estate investing. Understanding the fees in closing a deal is a must. But what are the fees, and in particular, what are points on a hard money loan?
Hard Money Loans 101
A hard money loan bridges the gap between purchasing a property and its eventual resale. They can also be referred to as “short term bridge loans.” These types of loans typically have loan terms anywhere from a few months to 1–3 years.
Borrowers use these types of loans for fix-and-flip properties. Lenders can provide funds to purchase as well as renovate the property.
Speedy lending is a selling point for many hard money lenders. Investors need quick funding to pay off the seller, get to closing, and then start the renovations.
As with any loan there are fees. There are many working parts and people involved in the loan process. These include work done by loan analysts, underwriters, title companies, accountants, and loan servicing staff. To cover these expenses, private and institutional lenders use fees to cover their costs.
One of these fees are loan origination fees, also known as “points.”
How Points are Measured
Points are typically higher for hard money loans compared to conventional money lenders such as banks. On average, points can run anywhere from 1–5% of the loan amount.
But what is the value of a point? In general, a point is equal to 1 percentage point of the loan.
For example, an investor applies for a loan amount of 100K. The hard money lender can get the investor that amount with 2 points on the loan.
The cost of the points to the borrower for this loan is therefore $2000.
Hard Money Loan Fees
Fees on hard money loans can vary from lender to lender. These can include:
Appraisal or Broker Price Opinion (BPO) are fees charged by a licensed appraiser or broker. These fees can run anywhere from $50 for a BPO or $300–$450 for a licensed appraiser.
Title Fee is assessed when a title company researches and insures the title. This service verifies that there are no liens or legal issues with the property’s title.
Application Fee is the cost to apply for the loan.
Inspection Fee is an evaluation by a licensed inspector to assess the issues with the home, including structural, electrical and plumbing, and cosmetic. Inspection fees can run anywhere from $400–$500.
Document Processing Fee is the cost of processing your loan and documents.
Total closing costs can be anywhere from 2%–5% of the total loan amount. Some of the above fees can be negotiated between the buyer and seller but each state and buying opportunity is different.
There can be additional fees, depending on which state you are working in. Some states require a lawyer to review documents. These states include:
- District of Columbia
- New Hampshire
- New Jersey
- New York
- North Dakota
- Rhode Island
- South Carolina
- West Virginia
Understanding what are points on a hard money loan is one piece of the puzzle. Experienced real estate investors know the need to calculate all their costs going into a deal. This insures that there is good profit after the sale of their fix-and-flip investment. Understand the questions to ask a private money lender and shop around. Come to the lender with a great deal and that will open up opportunities for the financing.
Interested in a Hard Money Loan?
Get answers to any of your Hard Money Lending questions. A Cogo loan analyst will provide you the information you need to complete your next investment opportunity. Answers are free and the people are friendly. Call 800-473-6054 for your consultation today or click the button to start your loan application process today!