Loan points are upfront fees a lender charges at closing, quoted as a percentage of the loan amount. One point equals 1% of the loan. Origination points pay the lender for making the loan. Discount points are optional prepaid interest that buys a lower rate. On a hard money loan, points are commonly a required part of the price, and the number varies by lender.
Cost of points = loan amount × number of points × 1%
Say you borrow $200,000 for a flip at 10% interest-only with 2 points. The points cost $200,000 × 2% = $4,000, due at closing or, with some lenders, taken out of the loan proceeds. Six months of interest is $200,000 × 10% × 6 ÷ 12 = $10,000. Total financing cost is $14,000, which is 7% of the loan in half a year, the same pace as 14% a year, well above the 10% rate.
The most common mistake is comparing loans by interest rate alone. Points are charged up front and are not reduced if you repay early, so they hurt most on short holds. Some lenders also charge extra points to extend a loan past its term. Points are figured on the loan amount, not the purchase price, and they add to the cash you need on top of your other closing costs.