Jeff is a real estate investor in Pleasanton, CA. He finds an older property for sale and decides to rehab it and sell it for a profit. The property has a cost of $400,000 but he doesn't have the full amount so he obtains a private money loan with Dynamic Lending Corporation. The lender agrees to write a note with a 50% loan-to-value (LTV) so they are willing to loan $200,000 on the project. The note is interest-only, with monthly payments, and is for 12 months at 8% interest with 5 origination points paid at the closing.
Therefore, Jeff will have to make a $200,000 down payment in addition to paying a $10,000 origination fee. The lender will collect $1,333 in monthly interest payments from the Jeff. This is computed by taking the full note value of $200,000, multiplying by the 8% interest rate, and then dividing that number by 12. Jeff's plan is to finish the project within the 12 months and sell it for $540,000. If he succeeds he will collect a profit of $114,000 ($540,000 sales price - $200,000 principle - $200,000 cash paid at closing - $10,000 origination fee - $16,000 in total interest paid.