Hard money is often marketed as the fast, no-hassle path to real estate riches. Need to close in 7 days?

No problem. Got bad credit? Doesn’t matter.

Want to borrow against the value of the deal instead of your bank balance? Perfect.

But there’s a catch.

Hard money lenders might not ask a lot of questions up front, but that doesn’t mean they don’t charge a price for that convenience.

The real cost of a hard money loan isn’t just the interest rate.

It’s the points, junk fees, legal fees, underwriting costs, extension clauses, and prepayment penalties that can quietly eat into your profit margin… If you don’t know what to watch for.

In this article, we’re going deep on what hard money lenders don’t advertise, how these fees actually work, and how to protect yourself from losing money before the demo even starts.

What Are “Points,” Really?

“Points” are a percentage of the loan amount, charged upfront, usually at closing. One point equals 1% of the loan amount.

So if your lender says “2 points,” and you’re borrowing $300,000, you’re paying $6,000 up front.

Most hard money lenders charge 2 to 4 points, depending on:

• Your experience as a flipper

• The perceived risk of the deal

• Your track record with that lender

• Market conditions (higher risk = more points)

But here’s the truth they don’t usually tell you:

• Points are pure profit for the lender. Unlike interest, they’re not tied to how long you keep the loan.

• Points are paid upfront, even if the deal falls through. If you don’t close, you don’t get that money back.

• Points can be negotiated, especially if you’re bringing repeat business.

Interest Rate vs. Annualized Cost

Most hard money loans advertise interest rates like 10%–12%, but that number doesn’t tell the full story.

Let’s break it down:

Imagine you borrow $250,000 at 12% interest with 3 points for 6 months. That’s:

• $7,500 in points

• $15,000 in interest (12% annualized on $250,000 for 6 months)

Your actual cost for that capital is $22,500, which is not 12%. It’s more like 18%+ when you annualize it and include points.

And if you finish your flip early? Great, but you still paid all the points and may face…

The Prepayment Penalty Trap

Some lenders penalize you for paying early. Why?

Because if you repay your loan in 60 days instead of 180, they lose out on months of interest.

Common forms of prepayment penalties include:

• A minimum interest period (e.g., 3-month minimum, even if you repay in 45 days)

• Flat penalty fees for early payment

• “Make-whole” clauses that require you to pay full interest regardless

Always ask:

“If I pay this loan off early, do I still owe interest for the full term?”

Junk Fees, Explained

Junk fees are small charges sprinkled throughout your loan documents. They don’t sound like much individually, but they add up fast.

Look out for these:

• Underwriting fee ($750–$2,000)

• Loan processing fee

• Wire fee

• Doc prep fee

• Servicing fee

• Draw fee (every time you request a reimbursement)

• Extension fee

• Loan termination fee

• Trust deed recording fee

• Credit report fee

Even reputable lenders charge some of these. The trick is knowing:

• What’s standard (like doc prep)

• What’s inflated (a $2,000 “processing” fee on a simple flip)

• What’s negotiable (many of them!)

Extension Clauses and Hidden Timelines

Most hard money loans are 6 or 12 months long. What if your flip takes longer?

That’s where extension fees come in.

• You may be charged:

• A flat fee ($1,000+)

• Additional points (e.g., 1% of the loan amount for a 3-month extension)

• A higher interest rate for the extension period

Worse, some lenders include automatic resets, meaning if you go even a day over your term, you’re hit with new points as if it were a new loan.

Always get clarity on:

“What happens if I go over the initial term?”

The Legal Fee Game

Hard money lenders often include legal fees in the borrower’s costs.

Why?

Because they’re using lawyers to:

• Draft the note and deed of trust

• File liens

• Protect themselves, not you

Expect $500–$1,500 in legal fees per deal. And yes, you’re paying their lawyer to protect them.

Servicing Fees After the Close

Your hard money lender might hand off your loan to a servicer, a third-party company that manages the loan, handles payments, and processes draws.

Servicing fees can be:

• Flat ($25–$100/month)

• Percentage-based (0.5%–1% of the loan annually)

These are often buried deep in your closing documents. Look for:

• “Servicing fee”

• “Loan administration fee”

• “Draw fee” (each time you request funds for rehab stages)

Why They Don’t Advertise the Real Costs

Hard money lenders know their typical borrower isn’t comparing APRs. They’re flipping a house and want speed and flexibility.

By advertising “12% interest and 2 points,” they make the loan sound cheaper than it is.

But when you add:

• Points

• Legal fees

• Servicing

• Draws

• Prepay penalties

… the real cost can easily exceed 20%+ annually.

That’s not inherently bad. It just has to be baked into your flip math.

How to Protect Yourself

Here’s how smart investors avoid getting blindsided:

1. Ask for a Loan Estimate Breakdown
Request a full fee sheet, itemized. Don’t rely on the term sheet summary.

2. Annualize Your Real Cost
Use a hard money loan calculator to compute the true APR, including points and fees.

3. Negotiate as a Repeat Borrower

Lenders love repeat clients. Ask for:

• Reduced points

• Waived junk fees

• Better draw schedules

4. Read the Extension Clauses Carefully
Understand what happens after the term ends. Does the loan roll over? Do you get charged new points?

5. Build a Cushion into Your Flip Budget
Hard money fees can shift mid-deal. Add 1–2% of total costs as a contingency for loan-related surprises.

Alternatives to Consider

If hard money looks too expensive, here are options to explore:

Private Lenders
More flexible and potentially cheaper, especially for friends/family or colleagues. But requires trust and documentation.

Partnerships
Split the deal with someone who funds it, and you split profits. Higher ROI if you don’t mind giving up equity.

HELOC or Personal Line of Credit
If you have strong personal finances, these can be cheaper options, especially for smaller flips.

Bridge Loans or Investor Loans from Local Banks
Some community banks offer short-term financing with lower fees.

When Hard Money Still Makes Sense

Despite the costs, hard money loans still work for many flippers, especially when:

• You’re in a competitive market and need to close fast

• You have limited cash but lots of equity in the deal

• You’re doing multiple flips and want to preserve liquidity

• The deal’s profit margin can absorb the cost

It’s not about avoiding hard money. It’s about knowing the game before you play.

Final Takeaways

Hard money can be a powerful tool, but only if you understand the real cost structure.

What they don’t advertise can kill your deal if you don’t plan for it:

• Points are expensive and non-refundable

• Junk fees can add 2–5% to your cost

• Prepay penalties can punish you for success

• Extension clauses can quietly double your fees

• Legal and servicing costs are often your responsibility

If you treat a hard money loan like free money, it’ll cost you. But if you treat it like a business expense, and bake every penny into your analysis, it can unlock deals no one else can touch.

Hard money isn’t cheap. But ignorance is even more expensive.