Rosalie finds a property in Caledonia, MI to remodel and resell. Since she doesn't have enough cash to buy the $370,000 property outright, she takes out a private money loan from Acme Investment Corporation. The lender agrees to make a loan with a 60% loan-to-value (LTV) so they are willing to extend $222,000 on the project. The loan is interest-only, paid monthly, and is for 18 months at 8% interest with 1 points paid at closing.
In accordance with the parameters of the deal, Rosalie will have to contribute a $2,220 origination fee in addition to 40% of the purchase price, or $148,000, since there is a 60% LTV. Acme Investment Corporation will collect $1,480 in monthly interest from the Rosalie. This is computed by taking the full loan amount of $222,000, multiplying by the 8% interest rate, and then dividing that amount by 12. Rosalie's plan is to complete the renovation within the 18 months and resell it for $444,000. If she succeeds she will earn a profit of $45,140 ($444,000 price - $222,000 principle - $148,000 cash at closing - $2,220 origination fee - $26,640 in total interest paid.