Hard Money Loans for House Flips: Points, Interest and Cash at Closing

A hard money loan for a house flip is a share of the price plus a share of the rehab, with points up front and interest every month. Hard money loan calculator math: loan = price × LTC + rehab × LTC; points = loan × %; interest = loan × rate × months ÷ 12; cash at closing = price + rehab − loan + points. On the example house: a $228,000 loan and $24,560 at closing.

How a hard money loan is sized: LTC on price and rehab

Hard money is a short-term loan from a private lender, secured by the house, made for the purchase and renovation of a property that a bank would not finance in its current condition. The lender looks at the deal more than at the borrower, charges more than a bank and expects to be repaid when the house sells or is refinanced, typically within 6 to 12 months.

The loan is quoted in LTC (loan to cost), the share of each cost the lender funds. There are two LTC figures because the purchase and the rehab are funded differently:

• LTC on purchase: a share of the purchase price, commonly 85–90%. You bring the rest at closing.
• LTC on rehab: a share of the rehab budget, often 100%. This money is usually held back and released in draws as the work is done (more on draws below).

Most lenders also cap the whole loan at a share of ARV (after-repair value, what the house should sell for once the work is done), often around 70–75%. On the example house, $228,000 is 71% of a $320,000 ARV, inside a typical cap. Check both limits; the lower one applies.

Loan amount = Purchase price × LTC on purchase + Rehab × LTC on rehab

The calculator takes the rehab figure you enter. In the app's deal analysis the loan is sized on rehab with its contingency, because that is what the project will actually cost; here, 10% more rehab would raise the loan to $232,800.

What points and interest cost

Two separate charges make up the cost of the loan. Points are a one-time origination fee, each point being 1% of the loan, paid when the loan funds. Interest is charged on the borrowed money every month, usually interest-only, so the balance does not fall until the payoff.

Points = Loan amount × Points %
Interest per month = Loan amount × Yearly rate ÷ 12
Total interest = Loan amount × Yearly rate × Months ÷ 12
Total financing cost = Points + Total interest

Lenders also charge processing, underwriting, draw inspection and wire fees. They are not in the formula because they vary too much; put them into the purchase closing costs of the deal once you have the lender's term sheet.

Worked example: hard money on the example house

The example house used across this site: ARV $320,000, purchase price $200,000, rehab $48,000, held 6 months. The lender funds 90% of the price and 100% of the rehab at 11% a year with 2 points, the app's starter defaults; your lender's terms will differ, and so will they from one market to the next.

Set against the cash deal on the same house, where the profit is $35,000, the financing takes half of it: 35,000 − 17,100 = $17,900, or 5.6% of ARV. What you get for the $17,100 is a much smaller cheque at closing.

Cash at closing: what you bring to the table

Cash at closing in this calculator is the loan's own gap: the part of the price and rehab the lender does not fund, plus the points.

Cash at closing = Purchase price + Rehab − Loan amount + Points

On the example house that is $20,000 of price the lender does not cover, $0 of rehab (funded in full) and $4,560 of points: $24,560. It is not everything the deal needs. Add the purchase closing costs ($4,000 at the app's default of 2% of price), the holding costs you will pay month by month ($9,000 over 6 months) and the rehab phases you pay for before each draw is reimbursed. Roughly $37,560 plus working capital for construction, against about $265,800 for the same house bought with cash.

That is what hard money buys: the ability to do the deal with a fraction of the cash, at a price. The return on the cash you put in is higher; the profit in dollars is lower; and the deal has a lender whose clock is running.

How rehab draws work

The rehab part of the loan is rarely wired at closing. The lender holds it in escrow and releases it in draws, usually three to five over the project: you pay the contractor for a phase, request a draw, an inspector confirms the work, the lender reimburses you a few days later.

Two consequences for the math:

1. You front each phase. Between paying the contractor and receiving the draw you need your own cash. On the example house the rehab is $48,000, so with four draws you carry about $12,000 at any time.
2. Interest on the rehab money starts later. Interest is charged on what has been disbursed, so the $48,000 earns interest from each draw, not from day one. If the draws are spread evenly over the project, the average rehab balance is about half, and the interest on the whole loan comes to about $11,220 instead of $12,540.

Some lenders charge interest on the full loan amount from closing regardless of draws ("Dutch" interest). Ask which it is; it is worth about $1,300 on this house.

The calculator's simplification, stated honestly

The free calculator and the deal analysis in Flip Investor OS charge interest on the full loan for the whole term. That is the "Dutch" case, and it overstates the interest for a lender who charges only on disbursed money.

The simplification is deliberate. It keeps the formula to one line you can check by hand, it is the worse of the two cases, and the difference (about $1,300 on the example house) is smaller than the uncertainty in the months. A project that runs three months long costs $6,270 more in interest at $2,090 a month, which dwarfs the draw-schedule saving. The app says so next to the figure: interest is counted on the full loan for the whole term; a draw schedule costs less.

If your lender charges on disbursed money only and the project is large, enter the lender's own interest estimate as a custom cost in the deal once you have the term sheet.

How financing changes the maximum offer

The maximum offer in the deal analysis is the highest price at which the profit still equals your target, every cost counted. Because the loan is a share of the price, the financing cost grows with the price, and the maximum offer with hard money is lower than with cash.

On the example house, with a 10%-of-ARV profit target ($32,000), default costs and 6 months:

The 7.5% is the financing factor: 2 points plus 11% for half a year (2% + 5.5%). On the purchase part of the loan it applies to 90% of the price, which is why each dollar of price costs $1.0875 with hard money (1 + 2% closing + 90% × 7.5%) against $1.02 with cash. The $16,238 gap is the price of the financing, paid by the seller if you hold your offer, or by you if you do not.

The 70% rule gives $176,000 for this house regardless of financing; it cannot see the difference. Open the free calculator and run your own lender's terms against your own house.

Hard money in Flip Investor OS

In Flip Investor OS a deal is either cash or financed, and a financed deal carries the lender's terms: LTC on purchase, LTC on rehab, rate and points. The deal analysis sizes the loan on the price and the rehab with contingency, works out points and interest for the planned months, and shows the profit, the margin, the ROI on your own cash and the maximum offer at which the profit still meets your target. The stress test with three more months moves the interest along with the holding.

The free hard money calculator does the same for a loan alone: loan amount, points, interest per month, total interest, total financing cost and cash at closing. It needs the price, the rehab and the months; a blank is "unknown", not $0, and nothing you enter is saved. Once the house becomes a project, the lender package (Pro) puts the deal, the estimate and the schedule into one PDF for the lender's underwriting, with the original plan frozen next to the forecast.