Consuelo takes a hard money loan from USA Funding Company in order to rehab a townhome to flip in the Grandmont No.1 subdivision of Redford, MI. The list price of the property is $160,000. The terms of the loan include a 85% loan-to-value (LTV), so she must contribute 15% of the price as cash to closing, which makes the principle note amount $136,000. The loan also includes the following features: 1) a 6 month term, 2) a 13% interest only note, and 3) a four point origination fee.
According to the terms of the loan, Consuelo will need to pay a $5,440 origination fee plus 15% of the purchase price, or $24,000, since there is a 85% LTV. After the loan is closed and Consuelo takes on the property, she will have to begin making payments each month of $1,473 to the lender ($136,000 principle x 13% / 12 months). At the end of the note, she sells the renovated property for $208,000. After deducting the $8,840 in interest payments ($1,473 multiplied by 6 months), the $5,440 origination fee, the $136,000 principle amount on the note, and the $24,000 she brought to closing, she will make a gross profit of $33,720 ($208,000 sales price minus $174,280 in costs). This amount would then be reduced by any building costs paid out of pocket.