Navigating the world of real estate investing often involves delving into various financing options. One such option is hard money loans. These loans are typically provided by private investors or companies and are secured by real estate. Unlike traditional bank loans, hard money loans are characterized by their quick approval process, higher interest rates, and shorter loan terms. A crucial aspect of hard money loans is the concept of “points.” This blog post will explain what hard money points are and how they are calculated.
What Are Hard Money Points?
In the context of hard money loans, points are upfront fees charged by lenders as a percentage of the loan amount. These points represent the cost of obtaining the loan and are paid at closing. They are separate from the interest charged on the loan but contribute to the overall cost of borrowing.
Why Are Points Important?
Points are important because they can impact the total cost of your loan. Understanding how they work can help you make more informed decisions about your financing options. Points can also be a critical factor when comparing different hard money lenders, as the points charged can vary widely from one lender to another.
How Are Hard Money Points Calculated?
Calculating hard money points is relatively straightforward. Here’s a step-by-step guide:
- Determine the Loan Amount: Start by knowing the total amount you are borrowing. For example, let’s assume you are taking out a hard money loan for $200,000.
- Identify the Points Charged: Lenders typically charge points as a percentage of the loan amount. For example, if a lender charges 3 points, this means 3% of the loan amount.
- Calculate the Points Fee: Multiply the loan amount by the percentage of points. Using our example:
- Loan Amount: $200,000
- Points Charged: 3%
- Points Fee Calculation: $200,000 x 0.03 = $6,000
In this example, you would pay $6,000 in points upfront to secure the hard money loan.
Factors Influencing the Number of Points
Several factors can influence the number of points a lender charges:
- Loan-to-Value Ratio (LTV): A higher LTV ratio, which means borrowing a higher percentage of the property’s value, often results in higher points.
- Borrower’s Creditworthiness: While hard money lenders focus more on the property than on credit scores, a borrower with a strong financial background might negotiate lower points.
- Loan Term: Shorter loan terms might come with higher points due to the increased risk for the lender.
- Market Conditions: In a competitive lending market, points might be lower as lenders compete for borrowers.
Example Scenario
Let’s consider a practical scenario to illustrate:
- Property Value: $300,000
- Loan Amount: $200,000
- Points Charged: 3%
Calculation:
- Points Fee: $200,000 x 0.03 = $6,000
If you are charged 3 points on a $200,000 loan, you will need to pay $6,000 upfront at closing. This fee is in addition to other closing costs and the interest you will pay over the loan term.
Conclusion
Hard money points are a crucial factor in the cost of obtaining a hard money loan. By understanding what points are and how they are calculated, you can better assess the true cost of your financing options and make more informed decisions. Always compare the points charged by different lenders and consider the total cost of the loan, including interest rates and other fees, to ensure you are getting the best deal for your investment needs.
Whether you’re a seasoned investor or new to real estate, having a clear understanding of hard money points will empower you to navigate the financing landscape with confidence.