Alvin is an investor in Carmel, IN. He locates an run-down property for sale in the St Vincent-Greenbriar neighborhood and wants to remodel it and re-sell it for a profit. The house has a cost of $330,000 but he does not have the full amount so he takes out a private money loan with North Star Finance. The terms of the loan include a 80% loan-to-value (LTV), so he must contribute 20% of the price as cash at closing, making the principle loan amount $264,000. The loan also includes these features: 1) a 6 month term, 2) a 12% interest-only note, and 3) a three point origination charge.
In addition to paying the $7,920 origination fee, Alvin will also fund $66,000 of the purchase with his own funds, or 20% of the sales price. The monthly interest-only payments will then be $2,640 to the lender. Assuming Alvin sells the renovated house for $429,000 at the end of the 6 month term, his total profit (not including remodeling costs) would be $75,240. This is calculated by taking the purchase price ($429,000) and subtracting the original principle ($264,000), the origination cost ($7,920), the money he contributed to closing ($66,000), and the total interest payments ($15,840).