Why It Matters
You need to know hard money loan terms before you sign anything because the financing cost is a direct line item in your deal profit. A lender who quotes "12% and 2 points" sounds simple until you calculate that a $250,000 loan costs $5,000 upfront plus roughly $20,000 in interest over 8 months. Understanding every term lets you underwrite accurately and negotiate from a position of knowledge.
At a Glance
- Interest rate: 9-14% annually; varies by lender, borrower track record, and deal risk
- Points: 1-4 origination points paid at closing (1 point = 1% of loan amount)
- LTV/LTC: 65-75% of after-repair value; loan-to-cost used for construction deals
- Term: 6-18 months; extensions available at 0.5-1.5% per extension period
- Draw schedule: Rehab funds released in 3-5 draws as work is completed and inspected
- Prepayment: Generally no prepayment penalties — lenders want capital back quickly
- Recourse: Most hard money is full recourse, requiring a personal guarantee
How It Works
Rate and points determine your upfront cost of capital. Interest rates on hard money run 9-14% annually, charged monthly on the outstanding balance. Lenders also collect origination points at closing — typically 1-4 points, where each point equals 1% of the loan amount. A $300,000 loan at 3 points means $9,000 leaves your pocket on day one, before interest starts accruing. Borrowers with strong track records and low-risk deals negotiate toward the lower end; first-time borrowers or thin-margin deals land at the top. Private lending relationships built over multiple deals are the most reliable path to better rates.
Loan sizing uses ARV and LTC as the primary constraints. Most hard money lenders cap total exposure at 65-75% of after-repair value (ARV) — what the property will be worth after renovation. For construction or heavy rehab deals, lenders may instead use loan-to-cost (LTC), which measures the loan as a percentage of total project cost including acquisition plus rehab budget. A $200,000 purchase with $80,000 in rehab has a $280,000 project cost; a 75% LTC lender advances up to $210,000, regardless of ARV. Once a fix-and-flip loan closes, rehab funds aren't delivered as a lump sum — they're held in reserve and released through a draw schedule as inspections confirm completed work, typically in 3-5 tranches.
Term, extensions, and recourse shape your exit risk. Hard money loans mature in 6-18 months. Extensions are available but cost money — usually 0.5-1.5% of the loan balance per period, plus continued interest. Two extensions at 1% on a $280,000 loan add $5,600 before you've made another repair. Unlike conventional mortgages, hard money lenders generally don't charge prepayment penalties — they want capital back to redeploy. Most hard money is full recourse: if the deal fails and the lender forecloses, they can pursue your personal assets for any deficiency. Non-recourse hard money exists but commands meaningfully higher rates.
Real-World Example
Brian finds a distressed duplex in Indianapolis listed at $187,000. His renovation scope — new HVAC, updated kitchens, fresh paint — prices out at $53,000. Comparable renovated duplexes sell for $315,000, setting his ARV.
His lender offers 70% of ARV: $220,500 at 11.5% interest, 2 points, 12-month term, with a 4-draw schedule for the rehab budget. Brian pays $4,410 at closing. The renovation wraps in 14 weeks; the property accepts an offer at $308,000 in week 19. After 4.5 months of interest ($10,538) plus origination ($4,410), his total financing cost is $14,948. He nets approximately $51,000 after financing, commissions, and renovation costs.
Pros & Cons
- No income verification: Approval is driven by the deal's ARV and renovation plan, not W-2s or debt-to-income ratios
- Fast closes: Hard money closes in 5-10 days versus 30-45 for conventional — essential for competitive and auction deals
- Flexible structure: Lenders can customize draw schedules, extension terms, and holdbacks to fit unusual deal structures
- No prepayment penalty: Exit early without a cost penalty — finish ahead of schedule and pocket the saved interest
- Track record rewards: Repeat borrowers with strong deal histories negotiate meaningfully lower rates and points
- High cost of capital: 9-14% interest plus 1-4 points makes hard money significantly more expensive than conventional financing
- Short timeline pressure: A 12-month clock forces decisions — slow contractors, permit delays, or a soft sales market can trigger a costly extension
- Personal liability: Full recourse means a failed deal can expose personal assets beyond the collateral property
- Draw friction: Rehab funds arrive in tranches after inspections — timing mismatches stall contractors waiting on draws
- Cross-default clauses: Some lenders cross-default all active loans; a problem on one deal triggers default across all of them
Watch Out
- Underestimating total financing cost: Points look small until you add them to 8 months of interest. Model the full cost — origination plus all interest from close to projected payoff — before committing. A lender charging 3 points and 13% beats one charging 2 points and 12% only on very short holds; the math flips quickly.
- Ignoring extension fee math: Extension fees apply to the full loan balance, not the amount drawn. Two extensions at 1% on a $280,000 loan cost $5,600 plus ongoing interest. Know your extension terms before you close.
- Cross-default exposure: If the loan agreement includes a cross-default clause, a problem on one deal triggers default across your entire portfolio with that lender. Ask explicitly before signing.
- Floor rate clauses on variable loans: Some variable hard money loans have a rate floor below which the rate can't drop. If you're modeling a declining-rate scenario, verify whether a floor applies before that assumption improves your projected numbers.
The Takeaway
Hard money loan terms — rates, points, LTV, draw schedules, term length, recourse — are the cost structure behind every short-term deal. Investors who understand them underwrite accurately and negotiate effectively; those who skip the analysis discover the true cost after committing. Before signing, model the full financing cost from origination through payoff, budget for a possible extension, and confirm whether cross-default clauses or floor rates apply.