How to figure the payment on interest-only loans?

Question

Not sure if this is the right place to ask...

I'm trying to structure a business proposal for a private lender and I'm having trouble running the numbers.

This is from an article I read on another investment forum. Hope its okay to quote here (the author is Zack Wiest):

They lend you money at 10%, 12%, even 15% simple interest for a term of twelve months. You pay them interest only payments monthly, quarterly, or whatever you agree. You promise them you will not ask for more than 70% of the after repair value ensuring their loan will be protected by sufficient equity should the deal go bad.

So... using the trusty business calculator, how do I figure interest-only payments?

(if this is easy, I'm going to feel *very* silly  8) )

Connie Brzowski · Answer

Now *that* is excellent advice  8) Thanks John~!

Connie Brzowski · Answer

John,

Thanks for that explanation-- we've never used a hard money lender before... had no idea that you also paid points at closing.

Is that common practice? Seems like it would really drive up the cost... maybe I need to try harder at getting the limit on our line of credit raised?  :crying:

Account Closed · Answer

Connie,

Simple interest is the normal way to calculate a hard money loan. The principal repayment for a few months is not going to make any difference if you have a 30 year amortization.

The interest calculation is more or less the same as would happen with a working line of credit. You pay to rent the money but you do not pay down the loan monthly.

Do note that up front costs that are paid at closing (added into the loan) will push up the effective interest rate. If you are paying 15% and 5 points that is closer to 21% if held for the year. If you only need the loan for 3 months the points push up the effective interest rate even higher.

Simple rule. Short term money? Pay a higher rate and lower points.
Longer term money. Pay more points and a lower rate.

That is only a simple rule. Best to know how to calculate what the money is costing you so you can make a more precise and educated decision.

John Corey

Account Closed · Answer

Some of the time you will find a private lender who does not charge points.

True hard money will be close to 15% interest and 5 points. Over a period of a year it does add up so if you can find a cheaper source do so.

Note that it might make sense to do a deal or two with a HML just to build a track record. To have 1 or more HML all warned up and familiar with your business so when you find too many deals you know what you can do. A few even drop their charges or rates to their regular customers.

It also helps to understand HML terms so that you price your deals right when wholesaling to someone. If it is still a deal after HM charges then you know that most investors can afford to buy.

John Corey

Connie Brzowski · Answer

Hi Mike,

Hadn't looked at it that way, but makes sense-- thanks for your help  :D

(now where did I leave the stupid tissue box?)

Connie Brzowski · Answer

Rehab--

Opinion please?

That's what I thougt but it doesn't seem like very much...Do you think anyone would be happy with simple interest like that? I sure wouldn't...

Connie Brzowski · Answer

I guess if you get the interest rate high enough, then problem solved...

(Think I answered my own question :-P)

I should *not* try to run numbers with a head cold... but it *is* habit forming, you know  :crazed:

Calixto Urdiales · Answer

Hello there EyeSoreNoMore-

First of all are you asking to figure out what your payment will come out if you decide to take the hard Money or construction route? And are you going to determine what your payment will come out to if you do Interest only? Or did you want to determine what your payment will come out to if you decide to add up the taxes & insurance? Thank you for your time and have a wonderful day my firend............

Richard Warren · Answer

Simple interest is a simple calculation.  Example:

Borrow $10,000 at 6% interest = $600 per year or $50/month, the principal is never reduced.

8)

Connie Brzowski · Answer

Hi loki,

Sorry to be unclear-- I understand perfectly in my own muddled mind  :mrgreen:

I'm trying to find out what my payment will be if I do a 12 month, interest only loan.

I can see too many variables...

For simplicity, lets say I'm borrowing 50K to buy and rehab a property from a private lender. How is this structured to be attractive to the lender?

Lets say Uncle Joe is getting 4.9% from his cd at the bank and is willing to loan the money for one year at 10%, interest only payments to be paid in full in 12 months.

Clear as mud? I know this is probably *really* simple, but for some reason, its just not making sense tonight :tongue: