Daniel finds a house in Cumberland, MD to remodel and sell. Since he doesn't have enough cash to buy the $340,000 house outright, he decides to take out a hard money loan from Rising Sun Investment Company. The borrower will be required to contribute 45% of the purchase price in cash to the closing based on a 55% loan-to-value stipulated by the lender. This makes the loan principle from Rising Sun Investment Company $187,000. The terms of the loan also stipulate a five percent origination fee that will be paid at the closing and a 18 month, interest only note with a 9% rate of interest.
The borrower will have to fund a total of $32,400 up front to pay the $153,000 down payment in addition to the $9,350 origination fee. Once the loan closes, he will need to pay Rising Sun Investment Company $1,403 in monthly interest payments, or 9% times $187,000 divided by 12 months in a year. At the expiration of the note, he sells the renovated house for $510,000. After subtracting the $25,245 in interest payments ($1,403 times 18 months), the $9,350 origination fee, the $187,000 principle amount on the note, and the $153,000 he contributed to the closing, he will earn a total profit of $135,405 ($510,000 price minus $374,595 in total costs). This profit would then be reduced by any renovation costs paid by Daniel.