You have sold your property for $100,000, received a $10,000 down payment and are owed a $90,000 mortgage. The terms of the mortgage are:
10% p.a. interest, 360 month (30 year) amortization. The payments are $789.85 a month.
The note buyer offers to buy your mortgage and pay you full price, no discount. As follows: $30,000 in cash now, $30,000 in cash in 10 years and the last $30,000 in 20 years. Total $90,000 so you haven't lost a dime. Right? wrong!
This is even more misleading than the last deal we looked at. You give up $789.85 a month for 120 months and you get $30,000 cash now. The same scenario repeats in 10 and 20 years time.
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And this happens to you 3 times.
What's more, this is an even safer safe deal for the note buyer, their investment of $30,000 is secured by an asset worth $100,000. An investment to value ratio of 30%. And if the loans defaults, they get paid in full before you get a dime.
How about an early pay-off? This depends on the terms of your agreement, but you will often find that the note buyer is entitled to recover their full yield on the payments they were supposed to receive even if the loan pays off in one year.
Please understand, you will usually have to take some discount when you get cash for your mortgage. There are fair and proper reasons for this. Especially if you are selling a second mortgage. Just be an educated seller and understand both sides of the deal.
You will frequently hear that the reason you have to take a discount is the Time Value of Money.
"The reason you have to take a discount is because a dollar today is worth more than a dollar tomorrow." You might be asked, "Would you sooner receive $100 today or $100 in 30 years." The answer obviously is $100 today.
"Well then, if your $100,000 mortgage is over 30 years, why would anyone pay you the full principal balance today if they have to wait 30 years to get their money back?"
This is total baloney because it assumes that your mortgage is not giving any return for the next 30 years. Yes of course this would be true if you give someone a zero interest loan and there were no payments made on it for 30 years. But in almost all cases you are going to charge INTEREST.
So the question really should be, "Would you invest $100,000 today to receive a steady income stream for 30 years and get your principal back as the borrower makes payments?" And the answer to that should be, "Maybe". Depending on the interest rate, your time frame, the safety of the note etc.
This is what BANKS do when they lend someone money to buy a home. They give them a mortgage in anticipation of receiving a monthly return on their money in interest. Imagine walking into your friendly neighborhood bank and telling them that you will pay off the mortgage they gave you last week if they will give you a 20% discount. I don't think they'll go for that, do you?
Furthermore most mortgages get paid off within 7 years. So you probably won't have to wait 30 years anyway. But of course, no one can guarantee that except by requiring a shorter mortgage term. People who invest in mortgages don't like them to be paid off early. In fact the risk of this happening is called the "pre-payment risk." Unless they have bought the mortgage at a discount to the face value. Then an early payoff means a quicker return of capital and a higher yield.
Note buyers ARE entitled to discount the value of the mortgage depending on the interest rate being collected, the security of the collateral, the credit rating of the borrower, the cost of an appraisal, cost of title insurance and a fair profit margin for themselves. No one works for nothing.