Uptown Investment Company issues a private money loan to Jesse for a remodeling project in Bridgewater, MA, on a house that is listed for $170,000. The loan-to-value (LTV) on the note is 85%. This means Jesse will need to bring 15% of the purchase price to closing and the principle will be $144,500 on the loan. The deal also consists of these features: 1) a 12 month term, 2) a 13% interest only note, and 3) a two point origination charge.
In addition to paying the $2,890 origination fee, Jesse will also fund $25,500 of the purchase with his own funds, or 15% of the purchase price. The lender will collect $1,565 in monthly interest from the Jesse. This is computed by taking the total loan value of $144,500, multiplying that by the 13% interest rate, and then dividing that number by 12. Jesse's intention is to finish the remodel within the 12 months and re-sell it for $212,500. If he succeeds he will earn a profit of $20,825 ($212,500 sales price - $144,500 principle - $25,500 down payment - $2,890 origination fee - $18,785 in total interest paid.