Terri finds a duplex in the Jefferson Chalmers subdivision of Grosse Pointe, MI to flip and resell. Since she doesn't have enough cash to acquire the $380,000 house outright, she decides to take out a hard money loan from Boom Funding Corporation. The loan-to-value (LTV) on the deal is 50%. This means Terri will have to bring 50% of the sales price to closing and the principle amount will be $190,000 on the note. The loan also consists of the following features: 1) a 6 month length, 2) a 13% interest-only note, and 3) a five point origination fee.
Accordingly, the borrower will have to contribute a $190,000 down payment in addition to paying a $9,500 origination fee. The monthly interest-only payments will then be $2,058 to Boom Funding Corporation. At the end of the loan, she sells the rehabed property for $513,000. After subtracting the $12,350 in interest payments ($2,058 multiplied times 6 months), the $9,500 origination fee, the $190,000 principle amount on the loan, and the $190,000 she brought to closing, she will earn a total profit of $111,150 ($513,000 sales price minus $401,850 in costs). This profit would then be reduced by any rehab costs paid by the borrow.