Elva finds a townhome in the Ingleside Heights subdivision of Daly City, CA to remodel and re-sell. Since she doesn't have enough cash to acquire the $280,000 house outright, she takes out a private money loan from Acme Finance. The lender agrees to write a loan with a 55% loan-to-value (LTV) so they are willing to extend $154,000 on the property. The deal also has the following features: 1) a 6 month term, 2) a 8% interest only note, and 3) a five percent origination charge.
Elva must bring a total of $32,400 upon closing to pay the $126,000 down payment in addition to the $7,700 origination fee. The monthly interest only payments will then be $1,027 to the lender. If Elva sells the house for $336,000 after 6 months, she would realize a gross profit of $42,140 after subtracting the principle of $154,000, the money paid at closing of $126,000, the origination points of $7,700, and the aggregate interest payments of $6,160. This amount doesn't include remodeling costs.