Tim takes a hard money loan from Prosperity Lending Corporation in order to remodel a townhome to flip in Nicholasville, KY. The price of the house is $160,000. As the lender agrees to a 85% loan to value, Tim will have to put 15% down and the total amount of the note will be $136,000. The rate on the note is 10% for a length of 6 months and the lender requires a two point origination fee at the closing. The interest is to be paid on a monthly basis and the principle will be repaid after the sale of the property.
In accordance with the parameters of the loan, Tim will have to contribute a $2,720 origination fee in addition to 15% of the purchase price, or $24,000, since there is a 85% LTV. After the loan is closed and Tim takes the property, he will begin making monthly payments of $1,133 to Prosperity Lending Corporation ($136,000 principle x 10% / 12 months). If Tim sells the project for $192,000 after 6 months, he would then make a total profit of $22,480 after deducting the principle of $136,000, the cash paid at the close of $24,000, the origination points of $2,720, and the aggregate interest payments of $6,800. This gross profit doesn't account for renovation costs.