Prosperity Lending Company makes a hard money loan to Kyle for a remodeling project in North Haven, CT, on a property that is listed for $360,000. The loan to value (LTV) on the note is 60%. This means that Kyle will bring 40% of the purchase price to the closing and the principle amount will be $216,000 on the deal. The loan also includes these features: 1) a 18 month term, 2) a 12% interest-only note, and 3) a two point origination charge.
Kyle will have to bring $144,000 at the closing (40% on the 60% loan-to-value), plus he will need to pay the $4,320 origination fee. Once the loan is closed and Kyle takes the project, he will begin making monthly payments of $2,160 to the lender ($216,000 principle x 12% / 12 months). If Kyle sells the house for $450,000 after 18 months, he would then earn a gross profit of $46,800 after subtracting the principle amount of $216,000, the cash contributed at the close of $144,000, the origination points of $4,320, and the aggregate interest payments of $38,880. This gross profit does not account for building costs.