Teresa is a house flipper in Harrison, AR. She locates a run-down property and decides to renovate it and re-sell it for a profit. The house costs $280,000 but she does not have the full amount so she takes out a hard money loan with Trust Finance Corporation. The terms of the note include a 75% loan-to-value (LTV), so she must contribute 25% of the price as cash at closing, which makes the principle loan amount $210,000. The terms of the loan also include a four percent origination fee that will be paid at closing and a 18 month, interest-only note with a 9% rate of interest.
In accordance with the terms of the note, Teresa will have to pay a $8,400 origination fee plus 25% of the sales price, or $70,000, based on the 75% LTV. After the loan is closed and Teresa takes on the property, she will need to begin making monthly payments of $1,575 to Trust Finance Corporation ($210,000 principle x 9% / 12 months). At the end of the loan, she sells the renovated house for $420,000. After deducting the $28,350 in interest expenses ($1,575 multiplied by 18 months), the $8,400 origination fee, the $210,000 principle amount on the loan, and the $70,000 she contributed to closing, she will make a total profit of $103,250 ($420,000 sales price minus $316,750 in total costs). This amount would then be reduced by any building costs paid out of pocket.