Negotiating for Borrowers: Points vs. Note Rate

[Jared Newman]

When a borrower is negotiating terms with a lender, he/she needs to determine the amount of points and note rate that will work best for their situation. Here is a breakdown of what it looks like when a borrower chooses lower points or a lower note rate.

As a disclaimer, this blog post is meant to show borrowers the options they have and not direct them in a certain way. Borrowers should always keep their specific situation in mind when discussing terms with their lender.

The table below shows what will be the least expensive option for the borrower for their loan based on time.

Short Term Project	Long Term Project
Lower Points	Higher Points
Higher Note Rate	Lower Note Rate

Here is an example for a standard fix and flip loan with a 12-month term. Let’s say the lender provides the borrower with the options below for a $500K loan.

• 9.99% and 1%
• $4,162.50/month and $5,000 upfront
• 10.99% and 0.5%
• $4,579.17/month and $2,500 upfront
• 11.99% and 0%
• $4,995.83/month and $0 upfront

See the breakdown of the total fees the borrower would pay in the table below. The dollar amounts are rounded to the nearest number.

1 Month	3 Months	6 Months	9 Months	12 Months
9.99% and 1%	$9,163	$18,738	$29,975	$42,463	$54,950
10.99% and 0.5%	$7,079	$16,238	$29,975	$43,713	$57,450
11.99% and 0%	$4,996	$14,988	$29,975	$44,963	$59,950

As can be seen, each rate could be the best option for the borrower based on the amount of time that it takes for them to complete their project. If the project takes exactly six months, then it will not matter which rate the borrower chooses.

That said, if the borrower is managing multiple projects, they may prefer to keep more of their current reserves to use on other projects rather than saving a few thousand dollars in the long run by paying upfront points. The borrower should always ensure they have a solid estimate of how long their project(s) will take and run various scenarios of numbers to select the most optimal terms.

It will be helpful to be transparent and upfront with your lenders if you are working on several projects concurrently, so they can understand your plan. Conventus aims to work with borrowers to help them achieve their goals and complete the vision of their projects.