Gina is a house flipper in Campbell, CA. She discovers an run-down property in the West San Jose neighborhood and decides to rehab it and sell it for a profit. The house has a cost of $250,000 but she doesn't have the full amount so she takes out a hard money loan with Pretty Perfect Lending. The borrower will have to contribute 40% of the purchase price in cash to closing based on a 60% loan to value set by the lending company. This makes the loan principle from Pretty Perfect Lending $150,000. The terms of the loan dictate a 12% note for 6 months. They also require a 4 point origination fee, which will also have to be paid upon closing.
Accordingly, the borrower will be required to contribute a $100,000 down payment plus pay a $6,000 origination fee. The lender will collect $1,500 in monthly interest from the Gina. This is calculated by taking the full note amount of $150,000, multiplying that by the 12% rate of interest, and then dividing that number by 12. If Gina sells the remodeled project for $362,500 at the end of the 6 month term, her total profit (not accounting for remodeling expenses) would be $97,500. This is calculated by taking the sales price ($362,500) and subtracting the principle ($150,000), the origination cost ($6,000), the money she brought to closing ($100,000), and the total interest payments ($9,000).