# What are Points?

I am looking at getting some money from a hard moneylender but I have a question about some of the language he used. He said he borrowed money at 15% and 2 points. Now I have heard other lenders use the same verbiage. I understand what is meant by the 15%, but what are they meaning by saying “points”? Do they mean instead of lending at a rate of 15% he will really be lending at a rate of 17%?

1 Point = 1% of interest, however it is paid upfront…so, for instance if you close a \$50K hard money loan, you would pay 15% interest for whatever the term of the loan is PLUS you will pay \$1,000 in points (2% of \$50K) at closing.

Keith

Ok I understand now. Thanks very much. So basically I would be paying a total of 17% its just that 2% of the loan is upfront. What are going rates right now? Is 15% and 2 points low, high or competitive?

12-18%

3-6 points

No, actually, you’d be paying 15% interest and 2 points.

The two points are due and payable at closing and the 15% is an APR and is spread out over the duration of the loan. Unless there is a minimum holding period for the loan or a fee for terminating it early, you can pay the loan off early…If you pay the loan off in 6 months, you will only owe 6 months worth of interest…

Keith

From a hard money lender…8% TO 18% Points. Interest rate would be 8% to 18%.

So a \$50,000 loan for 6months, with terms of 15% and 2points would cost me \$1000 (2points) and \$7500 (15% of \$50,000)? Is that how I would figure it? Are there any good calculators I can use to figure out the APR?

Yes, Texas Intrument BA II

Nope…it’ll cost you \$1000 in points and \$3,750 in interest…the 15% is APR for a year…that’s 1.25% per month for 6 months or 7.5% interest for the 6-month period…as long as either it is written for a 6 month term or there is no pre-payment penalty.

Keith

Keith is right on the calculation. But yes the 7500 would be for the life of the loan.50,000 x 15% = 7500 divided by 12 months is 625 per month. 6 months x 675= 3750.

15% is the loan rate not the APR. The annual percentage rate is a blended cost of obtaining credit. It includes the loan rate, the up front points and certain other costs to close the loan. You don’t mention what the repayment terms are, is the loan partially amortized requiring monthly payments or is it a balloon loan with all principal and interest due at the end of six months?

Assuming it is a balloon loan then the total cost of obtaining the credit or APR is \$4,869 or about 19%. You borrow \$50,000 less the \$1,000 in points up front so you get \$49,000. You pay 15% annual interest rate which equals 1.25% per month and you make no payments until the loan is due in six months. The amount due at maturity is \$53,869 or the future value. Knowing the present value of \$49,000 and the future value of \$53,869 and the term 6 months you can derive the effective monthly rate of 1.59% for an annual percentage rate of 19%.

Buy a book on basic finance and get a good calculator as suggested and learn to use it so you don’t get taken by your lender.