Quick Guide to Loan Origination Points and Loan Origination Fees For Hard Money Loans
Hard money loan terms vary by lender and where they are located. A loan origination fee of 0.5% to 3% can be expected with interest rates of the loans from 6% to 13%. How to calculate a loan origination fee is simple and explained below.
In this quick guide, we answer various questions about origination points, (also referred to as loan origination fees). It doesn’t matter if you’re flipping a house, investing in commercial real estate, or some other non-owner-occupied real estate, here’s all you need to know on origination points and origination fees.
What’s the difference between Loan Origination Points and a Loan Origination Fee with Hard Money Loans?
Origination points are the origination fee a lender charges a borrower to make a loan. Think of the origination fee as a processing fee you pay the lender to acquire your hard money loan.
- An origination fee is the money the lender makes for the work they will do to arrange the loan for the real estate investor. That work may include processing the application, underwriting and funding the loan, evaluating the deal, and other consultative and administrative services that they do to take the loan from request to payment. (As much as we wish money was free, it’s not, and the service of acquiring a real estate investment hard money loan comes with a cost!).
How Do I Calculate My Loan Origination Fee?
Origination fees are usually a percentage of the total amount borrowed. To calculate the fee you will pay for the loan, you need to know what the origination points are that the lender will charge you.
- Origination points can be thought of as origination percentages. To calculate the loan origination fee, multiply the origination percentage by the total loan amount.
EXAMPLE: Let’s say the lender is going to charge you one point. One point is equal to one percent or .01.
If the loan is for $100,000 and you are paying one point, you would be charged 1% of the $100,000 loan or $1,000. [$100,000 times 1% (.01) equals $1,000]. If you are being charged two points, this would mean the fee would be $2,000, and so on.
|Calculate Loan Origination Fee|
|Amount you will borrow||$100,000|
|Less origination fee (1 point = 1% = .01)||$100,000 x .01 = $1,000|
|Amount that will disburse unless you roll the origination fee into the loan||$99,000|
Do all lenders charge origination fees?
Although not every lender charges an origination fee, if they don’t, they typically make up for it by charging a higher interest rate on the loan itself.
Always be aware of the pros and cons here. You may save money at closing, but you will pay more in the long run. This is due to the higher interest rate. So always ask questions, understand all of the fees, rates, and charges, and do the math!
Ultimately, there’s no way to avoid mortgage loan origination fees entirely.
How much should loan origination points or fees be?
Loan origination points or the loan origination fees are typically 0.5% to 1% for traditional mortgages, and with hard money loan origination fees are more commonly 2% to 3% of the loan amount. Origination fees can be negotiable. Reducing them or avoiding them usually means you will pay a higher interest rate over the loan’s life. So, we remind you again, do the math! (Or contact us, as we’re always here to help!)
Can loan origination fees be written off on taxes?
Loan origination fees are tax-deductible. We suggest you consult your tax accountant to understand the amount of money you will receive as a result.
About DFW Hard Money
DFW Hard Money is a private money lender serving real estate investors who are flipping houses, need funds for commercial property investments, transactional funding, developments, and more, for over 20 years.