Miriam takes a loan from Brown Finance Company in order to remodel a townhouse to resale in Elizabethtown, KY. The price of the property is $220,000. The lender agrees to write a note with a 85% loan-to-value (LTV) so they are willing to extend $187,000 on the project. The note is interest-only, with monthly payments, and is for 12 months at 8% interest with 5 points to be paid when the deal closes.
Miriam will have to contribute $33,000 at the closing (15% on the 85% LTV), plus she will have to pay the $9,350 origination fee. The lender will collect $1,247 in monthly interest from the borrower. This is calculated by taking the total note value of $187,000, multiplying by the 8% interest rate, and then dividing that number by 12. Assuming Miriam sells the remodeled project for $308,000 at the end of the 12 month term, her gross profit (not including renovation costs) would be $63,690. This is calculated by taking the purchase price ($308,000) and subtracting the original principle ($187,000), the origination fee ($9,350), the funds she contributed to closing ($33,000), and the total interest payments ($14,960).