Hard Money at 12% Plus 3 Points — Is That Actually Expensive?

"Twelve percent and three points" is a sentence that makes new investors flinch and experienced ones shrug. Both reactions are unexamined, because the quote by itself does not contain enough information to answer the question.

The cost of a loan is not its rate. It is total dollars out, over the time you actually hold it — and points behave very differently from interest.

The two costs behave in opposite ways

Interest accrues per day. Points are charged once, at closing, and never come back. That means the shorter your hold, the smaller your total interest — and the larger the annualized rate you effectively paid, because a fixed fee spread over less time is a bigger annual cost.

Worked example (hypothetical). A $200,000 interest-only loan at 12%, 3 points, plus $1,500 in lender fees.

• Points: $200,000 × 3% = $6,000
• Fees: $1,500
• Fixed cost regardless of timeline: $7,500
• Interest: $200,000 × 12% = $24,000/yr → $2,000/mo

Now run three timelines:

• 4 months: $2,000 × 4 = $8,000 interest + $7,500 = $15,500 total → 7.75% of principal in 4 months → ≈23.3% annualized
• 6 months: $12,000 + $7,500 = $19,500 total → 9.75% in 6 months → ≈19.5% annualized
• 12 months: $24,000 + $7,500 = $31,500 total → ≈15.75% annualized

Read that carefully, because it is the whole point. The four-month hold has the worst annualized rate and the best dollar cost — less than half the twelve-month figure. Those two facts feel contradictory and are both true.

Which number should you use?

It depends on the question you are asking.

Total dollars is what hits this deal's profit. When you are deciding whether this house pencils, $15,500 is the number that comes out of your spread. The annualized rate is irrelevant to the arithmetic of a single flip.

Annualized cost is what you compare lenders with. When you are choosing between capital sources for a repeatable strategy, you need a rate that accounts for the fees, or a lender with low rate and high points will look cheaper than they are.

Both are legitimate. Using the wrong one is how people end up shopping for the lowest rate and paying the most money.

Cheaper capital is not always cheaper

Worked comparison (hypothetical). Same deal, an alternative lender at 10% and 1 point, six-month hold:

• Points: $200,000 × 1% = $2,000
• Interest: $200,000 × 10% = $20,000/yr → $1,666.67/mo × 6 = $10,000
• Total: $12,000 — versus $19,500 from the first lender. A $7,500 saving.

That is real money and worth chasing. But price the rest of it honestly:

• If the cheaper lender takes three weeks longer to fund and the seller takes a competing cash offer, your saving is $0 and your deal count is one lower.
• If they cap the rehab draw at 70% of budget and you have to carry $30,000 of materials out of pocket for six weeks, that capital had a cost too.
• If they require a full appraisal and an inspection you would not otherwise pay for, subtract that from the $7,500.

Speed and certainty are features you are buying. The expensive lender is sometimes selling exactly the feature that makes the deal possible.

What to do instead of flinching at the quote

Convert every quote to total dollars at your realistic hold period — including origination, points, junk fees, draw fees, extension fees and the minimum interest guarantee, which many hard money loans have and which quietly makes a fast payoff cost more than the math above suggests.

Ask what happens at month seven. Extension terms are where hard money gets genuinely expensive, and they are rarely in the headline quote. An extension fee of one point plus a rate step-up can add several thousand dollars in the exact scenario — a slow sale — where you can least afford it.

Put financing cost in the offer. It is a line in the maximum allowable offer calculation, not an afterthought at closing. Two investors with different capital have genuinely different maximum offers on the same house, and the one who prices it correctly wins the deals worth winning.

Frequently asked questions

What is a point on a hard money loan?

One point is 1% of the loan amount, charged at closing. Three points on a $200,000 loan is $6,000, paid whether you hold the loan for one month or twelve.

Is 12% interest high for a hard money loan?

The rate alone does not answer it. A 12% loan with one point held six months costs fewer dollars than a 10% loan with four points held four months. Compare total dollars at your real hold period, not headline rates.

Why does a shorter hold have a higher annualized rate?

Because points and fees are fixed and charged once. Spreading $7,500 of fixed cost over four months is a larger annual burden than spreading it over twelve — even though the four-month loan costs far less in total.

Does the loan cost change my maximum offer?

Yes. Financing cost is a subtraction in the MAO formula alongside rehab, holding, buying and selling costs. Cheaper or slower money changes what you can pay for the same house.

What is a minimum interest guarantee?

A clause requiring you to pay a set minimum — often three to six months of interest — even if you repay early. It can make a fast flip cost the same as a slow one, so read for it before you assume a quick exit saves interest.