Jessie takes a hard money loan from Number One Lending Company in order to rehab a house to resale in Westport, CT. The sales price of the property is $380,000. Since the lender sets a 85% loan to value, Jessie will have to put 15% down and the amount of the note will be $323,000. The parameters of the deal dictate a 10% note for 6 months. They also require a 4 point origination fee, that will also have to be paid upon closing.
Jessie will need to contribute $57,000 to the closing (15% on the 85% loan-to-value), plus he will have to pay the $12,920 origination fee. After the loan closes, he will have to pay Number One Lending Company $2,692 in monthly interest fees, or 10% times $323,000 divided by 12 months in a year. At the end of the note, he sells the renovated property for $456,000. After deducting the $16,150 in interest payments ($2,692 times 6 months), the $12,920 origination fee, the $323,000 principle amount on the note, and the $57,000 he contributed to closing, he will make a gross profit of $46,930 ($456,000 price minus $409,070 in costs). This profit would then be reduced by any building costs paid by Jessie.