A point is 1% of a loan's amount, charged most often as an origination cost on private and hard-money loans (and as optional discount points on conventional loans, where paying points buys a lower rate). On investor loans, '2 points' simply means a fee of 2% of the loan amount, usually paid at closing. Points are easy to underrate because they are quoted as a small number; on a short-term loan they are a major share of the total cost of the money.
The formula / structureCost of Points = Loan Amount × (Points ÷ 100)
Points: a worked example
Worked example. A $150,000 loan at 2 points costs $3,000 at origination. If the loan is held 6 months, that fee alone equals an additional ~4% annualized cost on top of the interest rate — which is why short-term borrowers compare total dollars, not just the rate.
What affects Points
- Loan amount (points scale with it)
- How long the loan is held (short holds make points heavier per month)
- Lender type — hard money commonly charges points; conventional loans charge them optionally
- Negotiation and borrower experience
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