The True Cost of a Hard Money Loan (Hidden Fees Worked Example)

A hard money lender quotes you 10.5% interest on a 6-month fix and flip loan. You write 10.5% into your spreadsheet. Six months later you close the project and the loan paperwork shows you paid the equivalent of 16% annualized. Where did the gap come from?

Every operator who has done more than five flips has had this moment. The marketed rate is the headline; the all-in cost of capital is the truth. This post shows you how to compute the truth before you sign.

The five components of hard money cost

• 1. Interest rate (marketed) — 9–13% annualized, interest-only on the drawn balance.
• 2. Origination points — 1–3% of loan amount, paid at close.
• 3. Junk fees — underwriting fee, processing fee, document prep, wire fee, servicing fee. Add $1,500–4,000 to most closings.
• 4. Prepayment penalties / minimum interest — most hard money loans have a 3–6 month minimum interest charge, so a fast 4-month flip pays the same as a 6-month one in some structures.
• 5. Per-diem & extension fees — if you blow past maturity, expect 1% extension fee + 14–18% default rate on the unpaid balance.

Worked example — a typical $400k fix and flip loan

Loan amount: $400,000. Marketed rate: 10.5%. Origination: 2 points. Junk fees: $2,500. Minimum interest: 6 months. Term: 12 months, interest-only. You close the flip and pay off in 7 months.

• Interest paid: $400,000 × 10.5% ÷ 12 × 7 months = $24,500
• Origination (2 points): $400,000 × 2% = $8,000 (paid at close)
• Junk fees at close: $2,500
• Total cost of capital: $35,000 on a 7-month hold

Annualized, that's $35,000 ÷ ($400,000 × 7/12) ≈ 15.0% all-in cost — not the 10.5% you wrote in the spreadsheet. The gap is 4.5 percentage points, or about $11k per $400k loan over 6–7 months. Multiply that across 4 flips a year and you've under-budgeted $44k.

The shorter the hold, the more points hurt

Points are a fixed cost paid up-front, so they amortize across whatever your hold period turns out to be. Same $8k of points on a 4-month flip vs a 9-month flip:

• 4-month hold: $8k ÷ ($400k × 4/12) = 6.0% annualized — on top of the 10.5% interest rate.
• 7-month hold: $8k ÷ ($400k × 7/12) = 3.4% annualized.
• 9-month hold: $8k ÷ ($400k × 9/12) = 2.7% annualized.

This is why shorter is not always cheaper with hard money. Speed of execution matters, but a 4-month flip with 2 points doesn't save you what your spreadsheet thinks it does.

When the minimum interest provision bites

Many hard money loans have a "minimum interest" clause — the lender is guaranteed to collect at least N months of interest regardless of when you pay off. Common values: 3 months, 6 months. On a $400k loan at 10.5% with 6-month minimum, paying off at month 4 still triggers 6 months of interest charges: $21,000 instead of the $14,000 you'd otherwise owe.

Always read the prepayment clause before signing. It is the single most expensive paragraph in a hard money loan document, and most operators skim it.

Hard money vs DSCR — when to pivot

Hard money is acquisition + rehab financing. DSCR is takeout financing. The right move on a BRRRR is hard money for 4–9 months, then DSCR refinance once the property is stabilized — see the full comparison.

On a straight fix-and-flip, hard money is the dominant choice — DSCR doesn't underwrite vacant properties, and conventional won't close fast enough. Your job is to make hard money cheap by shopping rate sheets, negotiating points, reading the prepayment clause, and budgeting carry conservatively.

The kill list check

DealIntel's 25-point kill list specifically flags any fix-and-flip deal where projected hard-money carrying cost exceeds 30% of projected profit. That ratio is the single best leading indicator of a flip that pencils on paper and breaks in execution.

Related reading

• The true cost of renovation delays — why a 6-week slip eats $14k
• The BRRRR refi gate stress test
• 10 reasons flips lose money
• Hard money vs DSCR for BRRRR
• Hard money loan definition
• What are points on a hard money loan
• DSCR loan definition
• Holding costs definition
• Free BRRRR calculator — includes financing comparison