Rising Sun Finance Corporation makes a hard money loan to David for a remodeling project in Farmington, MI, on a house that costs $360,000. The terms of the loan include a 55% loan-to-value (LTV), so he must contribute 45% of the price as cash to closing, making the principle loan amount $198,000. The loan is interest only, with monthly payments, and is for 18 months at 13% interest with 4 points paid at the closing.
David must bring a total of $32,400 up front to cover the $162,000 down payment in addition to the $7,920 origination fee. After the deal closes, he will need to pay the lender $2,145 in monthly interest fees, or 13% times $198,000 divided by 12 months in a year. At the expiration of the loan, he sells the rehabed house for $522,000. After deducting the $38,610 in total interest payments ($2,145 times 18 months), the $7,920 origination fee, the $198,000 principle amount on the loan, and the $162,000 he contributed to closing, he will earn a gross profit of $115,470 ($522,000 sales price minus $406,530 in total costs). This profit would then be reduced by any rehab costs paid out of pocket.