We are used to talking about origination points and fees in reference to retail mortgages. Anybody who has purchased a house over the last 30 years has at least some exposure to the concept. But what about hard money and bridge loans? Do origination fees and points apply? That depends on the lender.
Hard money lenders are private lenders who, though licensed by their respective states, have a lot more flexibility in how they conduct business. Most charge origination fees based on a point system. But not all of them do. Some are content to make the bulk of the money on interest.
What Origination Fees Cover
An origination fee covers the administrative costs of approving, preparing, and funding a loan. That is the same across both hard money and institutional lending. Lenders charge the fee in order to cover the money they spend to get a loan from approval to funding.
Origination fees are viewed as separate from the loan itself. The same goes for other fees related to appraisal, document creation, and so forth. In essence, lenders charge the additional fees to cover their costs – hopefully, at cost. They make their profit on loan interest.
How Origination Fees Are Calculated
Origination fees are calculated as a percentage of the loan amount. As a general rule, one percentage point equals one origination point. So a hard money loan offered with five points would come with an origination fee equal to 5% of the loan total.
According to the experts at Salt Lake City, Utah’s Actium Partners, it is not unusual for hard money lenders to offer lower interest rates in return for higher points, and vice versa. A slightly higher interest rate can more than offset a lower origination fee while also reducing the amount of cash a borrower needs upfront.
Origination Fees and Taxes
Origination fees are considered part of the cost of borrowing. As such, they are allowable as a write-off on federal taxes. As for state taxes, that is a state-by-state matter. Borrowers need to consult state tax laws to determine whether they can write off origination fees or not.
Hard money borrowers should not expect to save a ton on their taxes by writing off origination fees. Write-offs only reduce the amount of taxable income a person has. The amount of the write-off does not correlate to a direct tax decrease of the same amount.
Hard Money Loans Can Cost More
It should be understood that hard money loans can cost more than their institutional counterparts. Both fees and interest rates play a role. As previously mentioned, fees cover a lender’s operating costs while interest provides the profit thereafter. Influencing both are loan terms.
Hard money loans are short-term loans, usually with terms of 6 to 24 months. That is not a lot of time for lenders to generate the profit they want via interest rates. As a result, interest rates on hard money tend to be higher compared to institutional loans. Higher fees also make up for some of the lost profit typical of short-term loans.
Don’t Be Afraid to Ask
Origination fees and points are a normal part of hard money lending. If you ever decide to apply for a hard money loan, do not be afraid to ask about every fee you’ll pay and how it’s determined. Any lender worth doing business with should be more than happy to explain things in detail.
In hard money lending, origination fees work the same way as they do in conventional lending. They cover administrative costs and are generally assessed as a percentage of the amount being borrowed.