Hard Money Loan Costs Explained: Points, Interest, Draws and Extensions

By MercFinancial · Published 2026-08-25 · Updated 2026-09-07

Hard money loan costs come in layers: origination points, interest-only payments, rehab holdbacks and draw fees, extension and exit fees. Here is how each is structured, how to compare two term sheets, and what a cheap-looking loan can hide.

Hard money loan costs are made up of several separate charges rather than one rate: origination points paid at closing, interest-only monthly payments (sometimes charged on the full loan amount, including undrawn rehab funds), fees on each construction draw, extension fees if the project runs past the term, and in some cases an exit fee or minimum-interest charge at payoff. The true cost of a hard money loan is the total of those charges over the months you actually hold it, not the headline rate.

This article explains how each charge is structured, which ones show up on the term sheet and which hide in the loan documents, how to compare two term sheets on the same deal, and the questions that separate a fairly priced loan from an expensive one. We do not quote rates or fee levels, because they change with the lender, the market and the borrower; what does not change is the structure, and the structure is what decides your cost.

"The first term sheet I got had the lowest rate of the three, so I almost signed it. Then I laid all three out over a seven-month hold and the cheap one cost the most, because of how the points and the draw fees stacked up."

What You Actually Pay For on a Hard Money Loan

A hard money loan is priced in pieces, and each piece is charged at a different time. The table lists the usual ones; not every lender charges all of them, and the labels vary.

Only two of those, points and the rate, appear in a lender's advertising. The rest live in the term sheet's fine print and the loan agreement, which is why two loans with the same advertised rate can differ meaningfully in cost.

Points and Origination: Paid Before the Work Starts

A point is one percent of the loan amount, charged at closing as the lender's origination fee. Points are paid once, whether you hold the loan for three months or twelve, so on short holds they are a large share of the total cost. Two questions matter more than the number of points. First, are they calculated on the total commitment, including the rehab holdback, or only on the initial advance? Points on undrawn funds are a real charge for money you have not received. Second, are they paid from your pocket or deducted from proceeds? Deducted points lower your cash to close but raise the balance you pay interest on.

Some lenders trade points for rate in either direction. Neither is automatically cheaper: a brief hold favors fewer points, and a hold that runs most of the term favors the lower rate, because interest accrues every month while points are paid once.

Interest-Only Payments and the Full-Balance Question

Almost all hard money loans are interest-only: the monthly payment covers interest and nothing else, and the principal is repaid at sale or refinance. That keeps the carry manageable on a property producing no income during renovation. The question that matters is which balance the interest is charged on.

Under what the industry calls Dutch interest, interest accrues on the full loan amount from day one, including the rehab holdback the lender has not yet released. Under non-Dutch interest, it accrues only on funds actually disbursed, so the payment rises as draws are funded. On a loan with a large rehab budget released over several months, the difference is material, and it never appears in the rate. Ask as well whether the lender collects an interest reserve at closing to cover the first several payments, and whether any unused reserve is refunded at payoff.

Holdbacks, Draws and Inspection Fees

On a fix-and-flip or renovation bridge loan, the rehab budget is held back and released in draws as work is completed and inspected. Each draw typically carries an inspection fee, and some lenders add a processing charge. The mechanics are covered in our guide to fix-and-flip loan draws.

Draw fees are small individually and add up when the schedule is chopped into many small releases. The larger hidden cost is time: a draw that takes ten days to inspect and fund is ten days of interest and carrying costs without progress, and contractors who are paid late slow down. Ask how draws are requested, who inspects, how long funding takes after approval, and whether draws are funded in arrears (you pay the contractor first and are reimbursed), which changes how much of your own cash the project needs.

Extensions, Exit Fees and Prepayment Terms

Hard money loans are short by design, and projects run long by nature. Most lenders will extend a loan past maturity, for a fee, if it is current and the project is progressing. Read the extension clause before signing: some lenders charge a flat fee per extension, some charge additional points, some raise the rate for the extension period, and some require a fresh valuation. A loan with a short initial term and costly extensions can cost more than a loan with a longer term at a slightly higher rate.

Two other charges appear at the end. An exit fee is due at payoff regardless of timing. A minimum-interest or prepayment clause requires a set number of months of interest even if you sell earlier. Neither is unusual, but both change the math on a fast flip. Default interest, a higher rate that applies after a missed payment or a maturity default, is the most expensive line in most loan agreements; know exactly what triggers it.

How to Compare Two Hard Money Term Sheets

Comparing rates alone is how investors pick the wrong loan. Compare the loans over the hold period you actually expect, with every charge included.

If you would like a second opinion on two term sheets you already have, a free 30-minute call with a funding specialist is built for exactly that comparison, with no obligation; you can book it here.

What a Cheap-Looking Loan Can Hide

A low rate paired with high points. Dutch interest on a large holdback. A six-month term with expensive extensions when your realistic plan is nine months. Draw fees combined with slow funding. A minimum-interest clause on a property you intend to sell quickly. A valuation requirement that adds weeks to closing and costs you the purchase. None of these is dishonest; each is a structure that suits some deals and not others, and the job is to match the structure to your project. How hard money compares with bank and DSCR financing in the first place is covered in hard money vs bank vs DSCR.

Where MercFinancial Fits

MercFinancial is a commercial funding brokerage in Houston, Texas. We are a broker, not a lender, and we do not promise approval or pricing. On a hard money or bridge request we take the deal's numbers, hold period and exit, match them across the lenders in our network of more than 160 wholesale sources, and lay competing term sheets side by side so the total cost over your hold is visible before you commit. A specialist can usually tell you within one conversation which programs typically fit and which cost structure suits your timeline.

Our real estate funding page outlines the investor loan types we place. If the property is tangled in existing debt problems, those come first, and we can point you toward the right resource for that.

Frequently Asked Questions

What are points on a hard money loan?

A point is one percent of the loan amount, charged at closing as the lender's origination fee. Points are paid once, so they weigh most on short holds. Ask whether they are calculated on the full commitment including the rehab holdback or only on the initial advance, and whether they are paid in cash or deducted from proceeds.

Do you pay interest on the rehab holdback?

It depends on the lender's structure. With Dutch interest, interest accrues on the full loan amount from closing, including undrawn rehab funds. With non-Dutch interest, it accrues only on funds disbursed. On a large renovation budget released over months, the difference is significant, so ask which applies before you compare rates.

What happens if a hard money loan is not paid off by maturity?

The loan enters maturity default, which usually triggers default interest and late charges until it is extended or paid off. Most lenders will extend a performing loan for a fee if the project is progressing. Request the extension in writing before maturity and confirm the cost, the conditions and whether a new valuation is required.

Are hard money loan fees negotiable?

Some are. Points, extension fees and draw fees vary between lenders and are sometimes adjusted for experienced borrowers, strong deals or repeat business. Third-party costs such as title and valuation are usually fixed. Comparing several lenders' full cost structures is more effective than negotiating one lender's rate.

Is a hard money loan cheaper with fewer points or a lower rate?

It depends on how long you hold it. Points are paid once, so on a short hold a loan with fewer points and a higher rate usually costs less. On a longer hold, monthly interest dominates and the lower rate wins. Run both structures over your realistic timeline, including a slip, before choosing.

This article is for educational purposes only and is not financial advice. Loan programs, rates, and approvals vary by lender and borrower profile.