On a short hold, points cost you more than rate. That is the whole answer, and the math behind it is simple enough to do in your head at a walkthrough. One point is one percent of the loan charged once, up front. Interest accrues monthly. So one point equals roughly one month of interest at a 12 percent rate, a little more at 10 percent, a little less at 14 percent. If you are in and out in six months, a lender charging one extra point has to beat the other lender's rate by about two percentage points just to break even. On a twelve month project the balance shifts, and by month eighteen the rate is what is eating you. This article gives you the formula, works real numbers, and then covers the term that quietly costs more than either one.
The formula
Convert points into months of interest:
Months of interest that one point buys = 12 divided by the annual rate in percent.
At 12 percent, 12 divided by 12 equals 1.0, so one point equals one month of interest. At 10 percent, 12 divided by 10 equals 1.2 months. At 9 percent, 1.33 months. At 15 percent, 0.8 months.
Now flip it. If Lender A charges one more point than Lender B, Lender A has to be cheaper on rate by this much to break even:
Rate advantage needed = extra points, times 12, divided by your hold in months.
One extra point on a six month hold needs a 2.00 percent rate advantage to wash. One extra point on a twelve month hold needs 1.00 percent. One extra point on an eighteen month hold needs 0.67 percent. Short holds punish points. Long holds punish rate. That is the entire principle.
Worked example: a $200,000 loan, six months
Say you are borrowing $200,000 and you expect to list at month four and close at month six. Two illustrative quotes, and note these are illustration numbers, not a quote:
- Lender A: 3 points, 10.0 percent interest only
- Lender B: 1.5 points, 11.5 percent interest only
Lender A: points are 3 percent of $200,000, so $6,000. Interest at 10 percent on $200,000 is $1,667 a month, so six months is $10,000. Total cost of capital: $16,000.
Lender B: points are 1.5 percent of $200,000, so $3,000. Interest at 11.5 percent is $1,917 a month, so six months is $11,500. Total cost of capital: $14,500.
The lower rate lender is $1,500 more expensive on this project, and the gap came entirely from the up front charge. Now run the same two quotes on a twelve month hold. Lender A: $6,000 plus $20,000 equals $26,000. Lender B: $3,000 plus $23,000 equals $26,000. Dead even at twelve months, and past that Lender B starts losing. The crossover is exactly where the formula said it would be.
Now the part that beats both: how interest is charged on your rehab holdback
Here is the line item most investors do not ask about, and it routinely swings more money than a half point either way.
A fix and flip loan usually has two pieces: the acquisition advance, funded at closing, and the rehab holdback, released to you in draws as the work is completed. The question is whether the lender charges interest on the entire loan amount from day one, including the rehab money still sitting in the holdback, or only on the balance you have actually drawn.
Run it. A $150,000 purchase advance with a $100,000 rehab holdback, at 11 percent, on a six month project where the draws come out roughly evenly across four months.
Charged on the full $250,000 from day one: about $2,292 a month, so roughly $13,750 over six months.
Charged on the drawn balance only: you start at $150,000 and step up as draws fund. Averaged across the six months your outstanding balance is somewhere near $200,000, so the interest is closer to $11,000.
That is roughly a $2,750 difference, on the same rate, same points, same term. It is larger than the gap between one point and another in the example above. When you compare two term sheets, this is the first question to ask, and the answer belongs in your spreadsheet before the rate does.
The other terms that move the total
The term length itself, and what happens after it
A six month term on a project that honestly needs nine months is not a savings, it is a deadline you will pay to move. Ask what an extension costs before you sign. A common structure charges a fee for an extension, quoted in points, and that fee lands exactly when your project is already over budget. Our rehab program runs 6 to 12 month terms, and picking the honest one at the start is cheaper than buying time later. Details are on the rehab loan page.
Prepayment penalty
On a flip loan, a prepayment penalty is the term that can erase the entire benefit of a fast project. If you sell at month four on a twelve month loan and the note has a minimum interest provision, you may owe interest for months you did not use. Ask directly: is there a prepayment penalty, and is there a minimum interest or minimum term provision, which is the same thing wearing a different name. Our rehab loans carry no prepayment penalty, which is the point of a short term product.
Fees that are not points
Origination, underwriting, processing, document prep, draw fees, and inspection fees. Draw fees in particular are per draw, so a lender charging a fee for each of five inspections is charging you a real number that never appears in the rate or the point quote. Add them up and put them in the same column as points, because that is what they are.
How to actually compare two term sheets
Stop comparing rates. Build one number instead: total dollars of capital cost over your realistic hold.
- Write down your honest hold in months. Not your optimistic one. If your last three projects ran eight months, use eight.
- Points, in dollars, on the full loan commitment.
- Interest, in dollars, over that hold, calculated the way that lender charges it, full commitment or drawn balance.
- Every flat fee, including per draw and per inspection fees times the number of draws.
- Any extension fee you are realistically going to trigger.
- Add. That total, divided by your projected profit, is the number that actually matters.
Do that on both sheets and the winner is usually obvious, and it is frequently not the one with the lower headline rate.
The number nobody puts in the spreadsheet
Everything above compares two lenders who will both close. The larger cost in this business is the lender who does not, or who takes six weeks to figure out that they will not. A deal lost because financing fell apart at day 21 costs you the entire spread on that project, which on a normal Middle Tennessee flip dwarfs every point and every rate difference discussed here.
So weight certainty accordingly. Ask how long from application to term sheet, what conditions typically hold a file up, how draws are inspected and how fast they are reimbursed, and whether the person quoting you is the one who will underwrite it. A lender who is one percent cheaper and three weeks slower is not cheaper. If you are still deciding between short term and long term capital in the first place, we compared the two structures head to head in hard money or conventional on an investment property, and the fundamentals of the product are covered in what is a hard money loan.
Rates and points move. Before you build a model on any number in this article, check the live program terms on our learn hub and product pages, or ask us for a term sheet on the actual deal.