Why the lowest hard money loan rate can cost you more

Investors spend plenty of time negotiating the rate. On a six-month flip, one extra origination point can erase twice the savings from a full percentage-point rate reduction.

When comparing hard money loan points vs interest rate, start with dollars through your expected payoff date. Points are an upfront cost; the rate accrues over time. On a short hold, points, interest on undrawn rehab funds, and payoff terms can matter more than a modest rate difference.

Hard money loan points vs interest rate: Do the six-month math

One point equals 1% of the loan amount. An origination point is a fee for making the loan. A discount point buys a rate reduction. Don't assume an origination charge automatically buys you a lower rate, or that one point of fees means one percentage point off the rate.

Take an illustrative $300,000 loan: $220,000 funded at closing and $80,000 held back for rehab. For this first comparison, assume interest accrues on the full $300,000 from closing, payments are interest-only, and payoff occurs after six months. Use annual rate divided by 12 for the monthly estimate. Actual daily accrual and payoff figures depend on the documents.

At 10%, interest runs $2,500 a month. At 11%, it's $2,750. Over six months, the full percentage point of rate you fought for saves $1,500. One extra origination point costs $3,000, assuming points are charged on the full commitment.

Compare two otherwise identical offers:

• 10% with three points: $15,000 interest plus $9,000 origination equals $24,000.
• 11% with two points: $16,500 interest plus $6,000 origination equals $22,500.

The lower-rate loan costs $1,500 more through month six, before other fees. These are interest-and-origination totals, not complete closing costs.

The break-even is straightforward: extra upfront cost divided by monthly interest savings. Here, $3,000 divided by $250 equals 12 months. At month 12, the two offers tie on these assumptions. Beyond that, the lower rate starts earning back its higher upfront cost. That isn't permission to hold past maturity.

Ask which amount the points apply to: the full commitment or the initial advance. A comparison using different fee bases is already off course.

Interest on money you haven't drawn changes the comparison

Two loans at the same rate can produce different interest bills. Under Dutch versus non-Dutch interest structures, the difference is the balance that earns interest. Dutch interest uses the full commitment, including undrawn rehab funds. Non-Dutch, also called as-disbursed interest, uses the amount actually advanced.

Keep the $300,000 example and a 10% rate. Assume four $20,000 rehab draws arrive at the ends of months one through four. The interest-bearing balances under as-disbursed interest are $220,000, $240,000, $260,000, and $280,000 during those months, then $300,000 in months five and six.

Estimated six-month interest is $13,333 as disbursed versus $15,000 on the full commitment. The difference is about $1,667. Move the draws earlier and that savings shrinks. Move them later and it grows, assuming payoff stays in month six.

That makes draw timing part of the price. If two offers use different interest bases, calculate each month's expected balance before applying the break-even formula. Add any undrawn-fund or commitment fee separately.

Dutch interest doesn't prove a lender funds draws faster. Ask about inspection requirements, documentation, retainage, and time from a complete draw request to funding. The practical issue in construction draw schedules is how much work you must finance before reimbursement. A cheaper interest structure won't cover a contractor payment while you're waiting.

Early payoff and delays can outweigh the rate savings

Everything above assumes the calendar cooperates. Price the loan for when it doesn't.

Draw delays: On the fully funded $300,000 balance at 10%, an extra month adds approximately $2,500 in interest, plus taxes, insurance, utilities, and other carrying costs. A two-week draw delay doesn't automatically create a month-long project delay. But if cash runs short and the crew stops, the downstream cost can exceed the financing savings. Contractors are many things. Patient creditors isn't usually on the bid.

Minimum interest: If the documents require six months of interest, selling in month four may still leave six months payable. In this full-balance example, that's $5,000 beyond four months of accrued interest at 10%. Ask how the minimum is calculated and whether a separate prepayment or exit fee applies.

Extensions: If maturity arrives before payoff, don't assume an extension is automatic. Confirm eligibility, notice deadlines, fees, and any rate change. An illustrative one-point extension fee on the full $300,000 is $3,000 before additional interest. If an extension isn't available, a replacement loan can bring another closing and another round of costs.

Ask for written payoff estimates at your early, expected, and delayed exit dates. The fix-and-flip loan guide provides the broader financing framework; the documents determine what your specific exit costs.

Compare the whole loan before choosing the rate

The rate deserves more weight as the balance stays outstanding longer. A one-percentage-point difference on a constant $300,000 balance is $4,500 over 18 months. A wider spread matters even on a short hold: 9% versus 13% produces a $6,000 difference over six months on that same balance.

For each quote, add origination charges, interest on the expected funding schedule, draw and inspection fees, other closing charges, and applicable payoff or extension costs. Run the same exit dates for each lender. Then compare the cash you must bring to closing and carry between draws. A lower total bill can still require more liquidity than your project has.

When evaluating fix-and-flip financing from Trilith Funding, bring the purchase figures, rehab budget, draw assumptions, and exit timeline so the discussion starts with the deal's cash needs. Terms depend on the property, borrower, and underwriting.

No loan structure saves a bad purchase. Choose the financing you can carry through a plausible delay, with a price you understand at payoff.

Put your term sheet against your actual project timeline. Request a quote or call (470) 771-7050 to talk through the strategy and financing path with Trilith Funding.