What does paying points on a money borrowed money means

Question

What does paying points on a money borrowed from hard money lender means?

For example, if you borrow $100,000 from a hard money lender at 16% and it takes you 6 months from start to finish to pay it back, your interest charges would be $8,000. And if you had to pay points at say 4 points, that’s a further $4,000, adding up to grand total in $12,000 in interest charges! I'm a little bit confused on the 4 points and don't know what it means.

George Despotopoulos · Answer

@Hilary Nwakor welcome to the forum!

As others mentioned, a point is a % of the loan amount. BTW!

4 points in your scenario usually mean 4% origination fee. This is the fee the hard money lender charges you to make the loan, it's basically like their commission. You usually pay this at closing. When you close you would get $100,000 less 4 point or $4,000. You would still pay interest on the whole loan amount and owe that at maturity (end of the loan term) or when you pay it back sooner.

I hope you're not looking to take on a 16% rate! There should be hard money lenders who could do better than that. If you search enough 12% - 14% is not uncommon, even for new borrowers/investors with lower credit.

JD Martin · Answer

Points = pay to play. Essentially it is a fixed amount of interest. Usually up front but not always as @David Dachtera notes above. In his example, if the lender didn't charge the 10 points, the loan would essentially be free for 6 months. There's no rhyme or reason to the strategy, it depends on the lender.

Andrew Postell · Answer

@Hilary Nwakor you have it correct.  1 point = 1% of the loan amount in a charge.  If it helps at all it does count as interest and you can write points off on your tax returns (but please consult a tax professional for the specifics).

David Dachtera · Answer

@Hilary Nwakor,

You got it right - a "point" is one percent of the amount of the loan. You either pay it up-front in cash or it might be added onto the "end" of the loan.

It's just a way for lenders to increase their ROI.

I have one colleague with a private lender who charges him 0% for the first 6 months, then 18% (good incentive to keep a project on schedule!) and 10 points. Even if the payback comes within the 6 months (0% interest), the lender still makes 20% annualized return.

What does paying points on a money borrowed money means

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