Zachary takes a loan from Downtown Investment Corporation in order to rehab a townhouse to resale in Radcliff, KY. The list price of the house is $320,000. Because the lender agrees to a 60% loan-to-value, Zachary will be required to put 40% down so the principle amount of the note will be $192,000. The terms of the deal dictate a 8% note for 18 months. They also stipulate a 5 point origination fee, which will also need to be paid upon closing.
In accordance with the terms of the deal, Zachary will have to pay a $9,600 origination fee in addition to 40% of the purchase price, or $128,000, since there is a 60% LTV. After the loan is executed and Zachary takes the project, he will have to begin making payments each month of $1,280 to the lender ($192,000 principle x 8% / 12 months). If he sells the remodeled house for $432,000 at the end of the 18 month term, his total profit (not including rehab costs) would be $79,360. This is computed by taking the purchase price ($432,000) and subtracting the principle ($192,000), the origination cost ($9,600), the cash he brought to closing ($128,000), and the total interest payments ($23,040).