Hard money loan interest works as simple, non-compounding interest on the outstanding principal, most often accruing daily on a 360-day or 365-day basis rather than monthly. If you borrow $200,000 at 12% with 3 points, you owe roughly $66.67 per day (using a 360-day year) before any principal paydown, plus $6,000 upfront. The headline rate is not your true cost—points and fees lift the effective APR well above the quoted number. Below, I break down the actual accrual math, show how risk drivers set your rate, and give a real flip scenario so you can model it yourself.
The Core Mechanic: Simple Interest Accrues Daily, Not Monthly
Most blog posts tell you hard money loans charge 8%–18% and stop there. That misses the engine. Hard money interest is almost always simple interest—it is calculated on the principal balance only, with no compounding on unpaid interest unless the loan documents explicitly capitalize it.
The accrual clock starts the day funds hit your account. The lender takes the annual rate, divides by either 360 or 365, and multiplies by the number of days the money is outstanding. A $200,000 draw at 12% on a 360-day basis costs $66.67 per day. Over 30 days that is $2,000; over 180 days it is $12,000.
360-Day vs. 365-Day Year: The Silent 1.39% Spike
Here is the thing nobody tells you about: many private lenders quote rates using a banker’s year of 360 days. Dividing by 360 instead of 365 raises the effective daily rate by 1.39% before any other fees. On a $1 million annualized loan, that quirk adds $5,556 of unexpected interest.
When I first funded a $150,000 rehab in Cincinnati, I modeled accrual on a 365-day calendar like my primary mortgage. The lender’s term sheet said “interest accrues daily on a 360-day basis.” My exit at day 94 cost $47 more than my spreadsheet predicted. That $47 mistake taught me to always confirm the accrual basis before signing.
Some states restrict this practice via usury statutes, but most private business-purpose loans are exempt. According to the Consumer Financial Protection Bureau, fee disclosures should be clear, yet hard money contracts often bury the basis in section 4.1 of the note.
A Real $200K Loan Walkthrough: Step-by-Step Interest Math
Let’s ground this in numbers you can reuse. Assume a fix-and-flip loan of $200,000 at 12% annual interest, 3 origination points, 6-month expected term, interest-only monthly payments, and a 360-day accrual year.
Step 1: Compute daily interest. $200,000 × 0.12 = $24,000 annual interest. Divide by 360 = $66.666… per day. Step 2: Monthly charge for a 30-day month = $2,000. Step 3: Points paid at closing = 3% of $200,000 = $6,000.
Step 4: Total interest for a full 180-day hold = $66.67 × 180 = $12,000. Add points = $18,000 total cost. If you sell on day 94, interest = $6,266.67, not the $6,000 a monthly model would guess.
To verify your own scenario, our hard money loan calculator automates this daily accrual so you don’t have to hand-build spreadsheets. I keep a live model open during every closing.
What Happens If You Pay Principal Down Early?
Hard money loans are usually open balance: as you repay principal (or the lender releases draws), the daily interest falls proportionally. If you pay $50,000 back on day 30, your remaining balance is $150,000, and day 31 onward accrues at $50/day instead of $66.67. This is why a careful draw schedule beats a lump sum for cost control.
Why Day Count Matters on a 9-Month Hold
Extend the same loan to 270 days on a 360-day basis and interest hits $18,000; switch to 365-day and it drops to $17,753—a $247 difference. Small in isolation, but across a portfolio of ten loans it funds a new roof. Always back-solve the lender’s payoff using their stated basis before wiring.
How LTV, Risk, and Exit Strategy Actually Set Your Rate
The headline 10%–18% range is not random. Lenders price three variables: loan-to-value (LTV), exit certainty, and borrower track record. Understanding the weight of each lets you negotiate from evidence, not hope.
Lower LTV equals lower risk. A 60% LTV loan on a $300,000 ARV (loan of $180,000) might price at 9%–10% with 2 points. At 85% LTV, the same deal could jump to 14%–15% and 4 points because the cushion shrinks.
Exit strategy matters more than most new investors think. If you have a signed purchase contract assigning the property, or a rehab with permits and a listing agent engaged, the lender reduces the risk premium. I once dropped a quoted rate from 13.5% to 11% by sending a fully executed resale agreement within 48 hours of term sheet.
The Three-Levers Rate Model
- LTV band: <65% = base rate; 65–75% = +1.5%; 75–85% = +3%; >85% = +5% or decline.
- Exit certainty: Confirmed buyer/contract = −1%; vague “market sale” = +0.5%–2%.
- Track record: 3+ completed flips = −0.5%; first deal = +1%–2% provision.
Use this matrix before calling a lender. It predicts the real number better than any “average hard money rate” blog post. Pair it with the accrual math above to see your all-in cost, not just the quoted spread.
The Points Problem: Converting Origination Fees Into True APR
Points are prepaid interest disguised as a fee. They are the reason the true APR on a hard money loan dwarfs the headline rate, especially on short terms. The math is straightforward but rarely shown.
Take the $200,000 loan above: $12,000 interest + $6,000 points = $18,000 total finance charge for 180 days. Simple APR = (Total Charge / Principal) × (365 / Term Days). That is (18,000 / 200,000) × (365 / 180) = 0.09 × 2.0278 = 18.25%. The quoted 12% is now 18.25% effective.
Shorten the term to 90 days and the APR jumps to 36.5% because the same $6,000 points are spread over half the time. This is the trap: points are fixed, time is variable. As the CFPB explains, a point equals 1% of the loan, but APR recognition depends on term.
Most people don’t realize that on a 3-month bridge loan, 2 points alone add 8.11% to the effective annual rate before a single day of interest.
Always ask the lender for a printed APR using the Real Estate Settlement Procedures Act (RESPA) methodology, even if exempt, to compare deals on equal footing. If they refuse, that opacity is a red flag.
Hard Money vs. Traditional Mortgage: 12-Month Cost Comparison
Investors often ask if a 7% bank loan is “cheaper” than 12% hard money. For a short flip, the answer is not obvious because speed and leverage offset rate. Below is a side-by-side for a $200,000 draw over 12 months.
| Cost Component | Hard Money (12% +3pts) | Bank Investor Loan (7% +1pt) |
|---|---|---|
| Interest (365 days, 360 basis) | $24,000 | $14,000 |
| Upfront Points | $6,000 | $2,000 |
| Closing Time | 7–10 days | 30–45 days |
| Total 12-Mo Cost | $30,000 | $16,000 |
The bank loan saves $14,000 in finance charges but may cost you the deal if the seller needs a 14-day close. Hard money buys certainty and speed; the interest premium is the price of that optionality.
Note: traditional mortgages often amortize, but many investor lines are interest-only. Either way, the accrual mechanic is monthly, not daily, which slightly lowers total if paid mid-month. Hard money accrues to the exact day, so you pay for every hour of exposure.
What Nobody Tells You: Accrual Quirks, Prepayment Penalties, and Floating Rates
The ideal path is simple interest, no prepay penalty, daily accrual. Reality includes landmines. I have seen three that regularly surprise first-time borrowers.
- Minimum interest periods: Some notes require 3–6 months of interest even if you pay off in 30 days. That converts a cheap early exit into a fixed $6,000 charge.
- Capitalized deferred interest: If you choose “no payments during rehab,” unpaid interest may be added to principal monthly, creating compounding—a silent rate hike.
- Draw-based accrual: On construction loans, you pay interest only on funded draws, not the full commitment. A lender quoting on full commitment is misleading your model.
Floating indexes are another edge case. Some hard money loans tie the rate to Prime + 6%. If the Fed moves, your exit math changes mid-project. I always model a +2% stress case before committing.
The thing nobody tells you about: weekend and holiday accrual is non-negotiable. Daily accrual counts every calendar day, so a Monday payoff still owes Saturday/Sunday interest. Close on Friday and you pay for the weekend whether you use the funds or not.
A Practitioner’s Checklist for Modeling Hard Money Interest Before You Sign
Before wiring funds, run this nine-point verification. I use it on every deal and recommend you bookmark it.
- Confirm accrual basis: 360 or 365 days?
- Identify rate type: fixed, Prime+margin, or tiered.
- Record origination points and any broker fees.
- Ask about minimum interest period or exit fee.
- Clarify if unpaid interest capitalizes (compounds).
- Map the draw schedule to actual rehab milestones.
- Calculate daily interest per $1,000 borrowed: Rate/360*1000.
- Compute effective APR with points using the formula above.
- Stress-test a 30-day delay and a 2% rate hike.
For the accrual step, our interest accrual calculator lets you toggle 360/365 and date ranges so you can match the lender’s schedule exactly.
Common Misconceptions That Cost Borrowers Thousands
Misconception 1: “Hard money interest works like a credit card.” Wrong. Credit cards compound daily; most hard money is simple unless capitalized. Misconception 2: “APR is irrelevant for a 6-month loan.” False—points make APR the sharpest comparison tool you have.
Misconception 3: “The quoted rate is negotiable like a mortgage.” In my experience, the rate is a function of risk levers, not lender whim. Show a better exit plan or lower LTV and the number moves; beg for a discount and it won’t.
Misconception 4: “Paying monthly saves money over paying at exit.” With simple interest, timing of payment does not change total if no capitalization; it only affects cash flow. But missing a monthly payment can trigger a default rate of 18%–24%, dwarfing the original spread.
My Hard-Won Lesson: The Flip That Almost Sank on a Rounding Error
In 2019 I managed a $320,000 flip in Kansas City. The lender quoted 11% with 2 points, 360-day accrual. My spreadsheet rounded daily interest to $97.78 (correct: $97.777…). Over 210 days, the rounding understated accrued interest by $42. Small—until the lender also charged a 1% exit fee on principal plus accrued interest, which compounded the rounding across the fee base.
At closing, the payoff statement was $388 more than expected. Not catastrophic, but it delayed wire approval by a day, pushing the sale recording to the next month and triggering a $2,600 extension. The lesson: never round accrual in your model; carry full precision or use a verified tool. The penny you drop becomes a thousand-dollar problem at exit.
Tools and Verification: Run the Numbers Yourself
Google’s top results give you rate ranges; they do not give you the daily mechanics. You now have the formulas, the three-lever model, and a real $200K walkthrough. The final step is independent verification.
Use the linked calculators above, request a written accrual schedule from the lender, and back-solve their payoff statement before signing the wire. If the numbers do not tie to the penny, do not close. In private lending, the math is the contract.