Understanding Payment Terms

[Mike Bayer]

I'm a bit confused on how a short term loan for a fix and flip works as far as the payments go.  For example if there was a 100k loan with 9% interest, what type of terms do companies typically offer.  I'm wondering how to calculate what a monthly payment would look like.  Of course there are different options I understand that, but what would be the most common option here?

I saw one that said it was a 12 month term, does that mean the borrower is expected to make 12 equal payments up to the 109k.  This is where I'm a little off.

[Doug Smith]

Hi @Mike Bayer, I'm happy to answer that. With most of us, you'll make interest only payments during the construction period (usually 12-18 months or until you get the C/O and sell it/convert it to a longer term loan) on a monthly basis. The interest will be usually be paid only on the amount you've drawn. For instance, let's say you have your $100K loan at 9% interest. Let's say you advance the first $70K to purchase the property. You'll only pay 9% annualized interest on what you have outstanding each month, so let's say you have an average balance of $70K that first month. You would normally pay ($70K X 9%)/12 = $525 that month. They lets say you advance another $20K for a total of $90K for that next month. Your next month would be ($90K X 9%) / 12 months = $675. That is overly simplified, but that's how most of us do it. I hope that answered your question.