Nathan takes a loan from Number One Lending Company in order to remodel a townhouse to resale in Macon, GA. The price of the house is $170,000. Because the lender agrees to a 70% loan to value, Nathan will need to put 30% down so the total amount of the note will be $119,000. The rate on the note is 13% for a length of 6 months and the lender requires a four point origination fee at the closing. The interest is to be paid on a monthly basis and the principle will be paid back after the property sells.
The borrower will have to fund a total of $32,400 up front to pay the $51,000 down payment in addition to the $4,760 origination fee. Once the deal closes, he will need to pay the lender $1,289 in monthly interest payments, or 13% multiplied times $119,000 divided by 12 months in a year. If he sells the remodeled project for $204,000 at the end of the 6 month term, his gross profit (not accounting for renovation costs) would be $21,505. This is calculated by taking the sales price ($204,000) and subtracting the original principle ($119,000), the origination fee ($4,760), the funds he contributed to closing ($51,000), and the total interest expenses ($7,735).