Paying Points Now, Later or Not at All: How Point Structures Work

Points are one of the biggest costs on a private loan, and when you pay them can matter as much as how many you pay. Some lenders offer more than one way to handle them. Here is how the common structures compare.

What a point is

A point is an origination fee equal to 1% of the loan amount. On a $300,000 loan, one point is $3,000. Points are separate from interest, third-party costs such as appraisal and title, and any processing or underwriting fees. They're part of what it costs to get the loan made.

Three common structures

1. Points paid at closing. The traditional approach. You pay the fee upfront, often out of your closing funds. In exchange, the rate is usually lower than the alternatives.

2. Deferred points. The fee is still owed, but it is added to what you pay at payoff instead of at closing. You keep more cash for the project now and pay when you sell or refinance, usually when profit shows up. Deferred structures often come with somewhat higher overall pricing, because the lender waits for its fee.

3. No points, higher rate. Some lenders will waive points in exchange for a higher interest rate. You pay nothing upfront, but you pay more each month. This tends to work best on short holds.

Not every lender offers all three, and the tradeoffs differ from one lender to the next.

Running the comparison

Example, round numbers only. A $400,000 loan. Three hypothetical options:

• A: 2 points at closing, 10% rate. $8,000 upfront. Interest about $3,333 a month.
• B: 2 points deferred to payoff, 10.5% rate. $0 upfront, $8,000 at payoff. Interest about $3,500 a month.
• C: 0 points, 11% rate. $0 upfront. Interest about $3,667 a month.

Over a 5-month hold: A costs about $24,700, B about $25,500, C about $18,300. No points wins.

Over a 12-month hold: A costs about $48,000, B about $50,000, C about $44,000. No points still wins in this example, though the gap narrows as the hold gets longer.

Change the numbers and the answer changes. The key is to run your realistic timeline, plus a delay scenario, through each option.

Which fits your deal?

• Paying at closing fits when you have cash available, expect a longer hold, and want the lowest rate.
• Deferring fits when cash is tight during a rehab or build and you're comfortable paying more at exit.
• No points fits short, predictable projects where speed keeps the extra interest small.

Also remember that cash saved at closing can be put to work. If deferring points lets you fund the rehab without a second source of money, that has real value.

What this means for you

Don't compare loans on rate alone or points alone. Ask for every structure available, run each one over your expected hold and a slower version, and choose the lowest total cost you can live with on cash.

Want to know how points would be handled on your deal? Ask RSC Private Lending when you send your scenario. Subject to underwriting.