North Star Lending issues a loan to Essie for a renovation project in Rochester, MN, on a house that costs $190,000. The borrower will have to fund 20% of the sales price in cash to closing based on a 80% loan-to-value set by the lending company. This makes the principle amount from North Star Lending $152,000. The terms of the deal also stipulate a four percent origination fee which is to be paid at closing and a 12 month, interest only note with a 11% interest rate.
In accordance with the terms of the loan, Essie will need to pay a $6,080 origination fee plus 20% of the sales price, or $38,000, since there is a 80% LTV. North Star Lending will collect $1,393 in monthly interest from the Essie. This is computed by taking the full loan amount of $152,000, multiplying that by the 11% interest rate, and then dividing that amount by 12. At the expiration of the note, she sells the rehabed house for $228,000. After subtracting the $16,720 in interest payments ($1,393 multiplied times 12 months), the $6,080 origination fee, the $152,000 principle amount on the note, and the $38,000 she brought to closing, she will earn a gross profit of $15,200 ($228,000 price minus $212,800 in total costs). This amount would then be reduced by any building costs paid by the borrow.