Derrick finds a condo in the Norwood Park West subdivision of Park Ridge, IL to remodel and resell. Since he does not have enough cash available to purchase the $160,000 house outright, he takes out a hard money loan from Suburban Funding Company. The loan-to-value (LTV) on the deal is 65%. This means that Derrick will have to bring 35% of the purchase price to closing and the principle will be $104,000 on the loan. The parameters of the loan also stipulate a three point origination fee that will be paid at closing and a 18 month, interest only note with a 8% interest rate.
According to the parameters of the loan, Derrick will be required to pay a $3,120 origination fee in addition to 35% of the purchase price, or $56,000, based on the 65% LTV. he will then pay $693 per month to the lender. If Derrick sells the project for $208,000 after 18 months, he would realize a gross profit of $32,400 after deducting the principle of $104,000, the money contributed at the close of $56,000, the origination fee of $3,120, and the aggregate interest payments of $12,480. This profit does not include remodeling costs.