Gay closes on a $180,000 renovation project in Fort Collins, CO, using a hard money loan from Forest Grove Finance Corporation. The lender agrees to issue a loan with a 60% loan-to-value (LTV) so they are willing to extend $108,000 on the house. The loan also consists of these features: 1) a 18 month term, 2) a 12% interest only note, and 3) a five point origination charge.
By the parameters of the note, Gay will be required to pay a $5,400 origination fee plus 40% of the sales price, or $72,000, since there is a 60% LTV. Forest Grove Finance Corporation will collect $1,080 in monthly interest from the borrower. This is computed by taking the total loan amount of $108,000, multiplying by the 12% interest rate, and then dividing that amount by 12. If Gay sells the renovated project for $270,000 at the end of the 18 month term, her gross profit (not accounting for rehab costs) would be $65,160. This is computed by taking the purchase price ($270,000) and subtracting the original principle ($108,000), the origination cost ($5,400), the funds she brought to closing ($72,000), and the total interest payments ($19,440).