Ramona finds a property in the Encanto subdivision of Lemon Grove, CA to rehab and re-sell. Since she does not have enough cash to purchase the $190,000 property outright, she decides to take out a private money loan from Credence Funding. The terms of the note include a 50% loan to value (LTV), so she must bring 50% of the price as cash at closing, which makes the principle note amount $95,000. The loan also includes the following features: 1) a 6 month term, 2) a 12% interest-only note, and 3) a one point origination fee.
Ramona will need to contribute a total of $32,400 up front to pay the $95,000 down payment in addition to the $950 origination fee. Credence Funding will collect $950 in monthly interest payments from the Ramona. This is computed by taking the full note value of $95,000, multiplying by the 12% rate of interest, and then dividing that amount by 12. Ramona's plan is to finish the project by the end of the 6 months and re-sell it for $228,000. If she succeeds she will collect a profit of $31,350 ($228,000 sales price - $95,000 principle - $95,000 cash at closing - $950 origination points - $5,700 in total interest.