Private Money: Definition of Terms

8 Replies

I'm probably overthinking this but I'm trained as an engineer so there is precedent for this kind of behavior.

I've read a bunch of descriptions of private money lending and I want to make sure I understand the details of the jargon used in these descriptions. Assuming the following "typical" scenario below, please help me with these questions. I realize the use of the word "typical" is loaded please take it to mean usual or common.

Scenario:

Property Value: $125k

Loan Value: $100k

LTV: 80%

Rate: 12%

Points: None

Term: 15 months

Collateral: 1st position lean

Questions:

  1. Is the interest rate expressed in terms of APR or something else?
  2. I've heard people describe the terms as interest only with a balloon at the end. What, exactly, does this mean (please include numbers)?
  3. Let's say the loan was to be used for a flip. If I were, by some miracle, to pay off the loan in 8 months instead of 15, what would the cost of the loan to me typically look like (please include numbers)

Thanks, in advance, for the information.

Cheers,

Russ

1. Can't tell since fees not specified. If no points and no fees then yes, APR (APR=interest rate).

2.  In 15 mo you are required to pay the entire 100k + interest, if you can't then subject to default.

3.  Let's say you paid it off in 8mo, payoff would be 100k+8k.  This is not a miracle, it's expected that you can do a flip in 4-6 mo.  If you can't average this it leaves a ? in your creditabiliy.

@Russell Zuck You would want to clarify some of these questions with the person you are borrowing the money from but here is my understanding. 

1. yes interest rate would be APR

2. Interest only means that for your numbers at 12% your monthly payment on the loan would be $1000.00. $100,000 x 12%=$12,000 divide that by 12 months= $1000.00. The balloon means that the $100,000 is due at the end of the term.

3. If you repaid the loan in 8 months your hold cost from the loan would be 8k 

Account Closed

Thanks for the replies.

It turns out I was overthinking things. From the private lenders perspective, I was thinking they'd want to ensure a 15% (15 month term at 1% per month) return whether I paid the loan off early or not. Thinking about it now, they can tune points charged and the rate to achieve a similar result to account for paying off the note early.

@Russell Zuck

You're not overthinking.  Read the note.  There may be a prepayment penalty.  If no prepayment penalty, like most notes in the private/hard money flip business, then you pay interest only for how long you have the money.

Account Closed

Excellent. Thanks for the clarification. There are additional knobs that can be tuned here so make sure you know what they are and where they're ponited.

@Russell Zuck and @Tyler Gibson I am piecing together a similar deal. How are you all calculating 1% per month? Am correct in thinking its Interest Amount/Term rate? 

In my example a 130k loan at 12% with repayment at 24 months --- 130k x 12% = $15,600 then divided by 24 months = $650. So if I repay in 10 months my carrying costs for loan would be $6500?

@Brandon Sok You might want to clarify if the 12% is annual or not. if it is annual then you would pay $15,600 per year. That would mean a payment of $1300 a month. Making the 10 month carry cost =$13,000. 

If you already know that 12% is total interest owed for the full 24 months then that would mean you have a 6% APR whitch is a pretty good deal for hard or private money.

Just make sure you know the numbers solid $6,500 vs. $13,000 is a big difference. If there is enough meat on the bone and you can absorb the difference then go for it. 

Originally posted by @Brandon Sok :

@Russell Zuck and @Tyler Gibson I am piecing together a similar deal. How are you all calculating 1% per month? Am correct in thinking its Interest Amount/Term rate? 

In my example a 130k loan at 12% with repayment at 24 months --- 130k x 12% = $15,600 then divided by 24 months = $650. So if I repay in 10 months my carrying costs for loan would be $6500?

If your APR is 12%, then this is how the math would work in your scenario: 130k x 12% = $15,600. If it's an interest-only loan, you'd divide that amount by 12 (number of months in a year) to get a monthly payment of $1,300.

You wouldn't divide it by 24 (months).  Just like with a traditional 30 year loan you wouldn't divide it by 360 (months).  That's just when the entire loan balance is due.