The rate is on page one. The expensive part is on page four. Most operators read a hard money note the way they read a term sheet: rate, points, term, done. The five lines that decide what the loan actually costs sit further in, and they only matter on the day something goes sideways, which is exactly the day you cannot renegotiate them.
Why the Headline Number Is the Least Important Number
Two lenders quote you the same rate and the same points. On paper the loans are identical. Then one project sells early, one runs long, one has a late payment in month four, and the two loans turn out to cost thousands of dollars apart. Nothing about the headline terms changed. The difference was in clauses you did not read because they did not seem to apply to a deal that was going to go fine.
Every deal is going to go fine on the day you sign. The note is written for the other days. Read it that way.
1. The Prepayment Penalty
This is the clause that punishes you for succeeding. You buy in January, finish in March, and sell in April. A note with a six-month minimum-interest clause says you owe interest through June anyway, on money you have already paid back.
Run the math on a $200,000 loan carrying $2,000 a month in interest. Pay off after three months on a six-month minimum and you write a check for $6,000 of interest on a balance of zero. That is three additional points on the loan, and it will not appear anywhere in the rate or the origination fee.
The clause travels under several names: prepayment penalty, minimum interest, guaranteed interest, yield maintenance. Some notes bury it inside an interest-reserve structure, so the reserve you funded at closing is simply never refunded. Whatever it is called, the question is the same. If I pay this loan off in month three, what do I owe? The answer should be principal plus interest through the payoff date and nothing else.
2. The Default Rate and What Triggers It
Every note has a default rate, ours included. It is the higher rate the loan accrues at once you are in default, and it exists for a legitimate reason: a lender whose borrower has stopped paying is carrying real cost and real risk. The default rate is not the trap. The trigger is.
Read the Events of Default section and list every item. A missed payment that goes uncured past the grace period is a reasonable trigger. So is failing to keep the property insured. Where notes get aggressive is in the long tail: a late property tax bill, a paperwork deadline, a minor covenant, a default on some other loan with some other lender. If any one of those items can flip the entire balance to a rate in the twenties without notice and without a cure period, you are one clerical error away from a very expensive loan.
Three things to look for: whether the lender has to give you written notice, how many days you have to cure, and whether the default rate applies from the date of the default or from the date the lender declares it. A note that requires notice and gives you a cure window is a note written by a lender who expects to work with you. A note that does not is written by a lender who expects to collect.
3. Extension Terms
Rehabs run long. Permits stall, a contractor disappears, the buyer's financing falls through two weeks before closing. If your note is silent on extensions, you have no right to more time. The price of ninety more days is whatever the lender decides to charge in month six, and month six is the worst possible month to be negotiating.
The version you want is written on page one, before you need it: how many extensions, how long each one is, and what each one costs. On our notes that is two 90-day extensions at two points each. On a $200,000 loan, ninety more days costs $4,000 and you already own the option. That is not a favor you have to ask for. It is a term you bought. We wrote about why we price it that way in The Extension You Already Own.
Also read what an extension requires. Some notes condition it on the loan being current, the property being insured, and the borrower requesting it before maturity. Those are fair. Some notes condition it on the lender's sole discretion, which means it is not an extension term at all. It is a sentence that sounds like one.
4. Draw Fees
If your loan funds the rehab in stages, each draw carries a cost. The straightforward version is a flat fee that covers the lender's time to verify the work and send the wire. Ours is $100 per draw, and the verification is a sixty-second video walkthrough you record on your phone, not a third-party inspector on your schedule.
The expensive version stacks. A percentage of each draw, plus a third-party inspection fee, plus a wire fee, plus a processing fee. Six draws on a $120,000 rehab budget at one percent per draw, a $175 inspection, and a $35 wire is $2,460 in draw costs. That is more than a point on the loan, paid in pieces small enough that nobody adds them up. Ask for the all-in cost of a single draw in dollars, then multiply by how many draws your scope needs.
Also read how long a draw takes. A fee schedule is a cost. A ten-business-day draw turnaround is a cost too, paid by your contractor waiting on the next check.
5. The Late Fee and the Grace Period
A late fee is normal. A payment due on the first, a ten-day grace period, and a five percent fee on the late payment is the standard shape, and it is what our notes carry. On a $2,000 payment that is a $100 fee if your wire lands on the twelfth. Annoying, not dangerous.
The dangerous version is short and connected. A three-day grace period tied directly to the default-rate trigger means a payment that is four days late does not cost you $100. It reprices the entire loan. Read the late-payment clause and the default clause together, because in a badly written note they are the same clause wearing two hats.
The Three Questions
You do not need to be a lawyer to protect yourself here. You need to ask three questions before closing week, in writing, and get the answers in writing.
What happens if I pay off early? The answer should be a number you can compute from the payoff date, with no minimum, no penalty, and no unrefunded reserve.
What happens if I pay late? The answer should name the grace period, the fee, and exactly when and how a late payment becomes a default.
What happens if I need ninety more days? The answer should be a price and a set of conditions you can meet, written into the note today.
If the lender cannot answer any of the three from the document in front of you, that is your answer.
How Ours Reads
For the record, and because we think a lender who writes an article like this should be willing to be measured by it: no prepayment penalty and no minimum interest. Two 90-day extensions at two points each, priced on the term sheet on day one. A $100 flat fee per draw, funded within 24 hours of the walkthrough. Ten-day grace on payments, five percent late fee. A default rate that applies to an actual default, not to a paperwork slip. Every one of those terms appears on the one-page term sheet before it appears in the note, and the two documents say the same thing.
A Pre-Signing Checklist
Before closing week, with the draft note in hand, confirm each of these in writing:
- Payoff in month three equals principal plus interest to date, nothing more
- No minimum-interest or guaranteed-interest clause, under any name
- Any interest reserve is refundable at payoff
- Every Event of Default listed, with notice and cure period for each
- Default rate applies only after notice and an uncured default
- Extensions: how many, how long, what price, what conditions
- Draw fee stated as an all-in dollar figure per draw, plus turnaround time
- Grace period length and late fee amount, and confirmation that a late payment inside the grace period is not a default
- The term sheet and the note match on every one of the above
If you have a note in front of you and want a second set of eyes on page four, call us at 804-208-0465. We will tell you what it says in plain English, even if it is not ours.