I need help understanding my new Lender

[Adrian Lemus]

Hi Biggerpockets, I need some clarification on what the lending company is going to really charge or better yet on how to do the Proper Math! 

On the contract it says the following:

The applicable annual rate will be 4.99% for the first month, increasing .5% for each subsequent month, up to a maximum annual rate to the lesser of 7.99% and the maximum amount permitted. 

I have had several people telling me different things. How do I go about on doing the proper math to understand how much interest will be charged? I totally understand the increments of .5% each month but what I don't understand is how the interest gets applied.

The 2 different options that keeps popping up from people that tries to explain this to me is the following:

If I borrow $100,000

Option A:

1st Month: $100,000 x 4.99% = $4,990 interest

2nd Month: $104,990 x 5.49% = $5,763 interest

3rd Month: $110,753 x 5.99% + $6,634 interest

Option B:

1st Month: $100,000 x (4.99% / 8) = $623 Interest

2nd Month: $100,623 x (5.49% / 8) = $690 Interest

3rd Month: $101,313 x  (5.99% / 8) = $758 Interest

[Kyle J.]

Without reading your note, I don't think anyone can answer this question 100% confidently because we don't know if this is an amortizing loan that requires principal & interest payments, or if it's a loan that just requires interest-only payments.  What I can tell you though is that both your Option A and Option B examples are not correct.

For the sake of giving you an example, I'll assume this is a hard money loan and requires interest-only payments (which almost all hard money loans do), so the principal amount will typically stay the same.  So here's how that would look in this example:

Option C:

1st Month: $100,000 x (4.99% / 12) = $415.83 Interest (cents rounded down)

2nd Month: $100,000 x (5.49% / 12) = $457.50 Interest

3rd Month: $100,000 x (5.99% / 12) = $499.17 Interest (cents rounded up)

(Note: You don't divide by 8 because it's an 8 month loan as you did in your example.  The interest rate is an annual rate so you need to figure out what the interest is per annum, and then divide by 12 to figure out what the interest is monthly.  You may then end up paying that interest for 8 months or however long you end up paying it.)