Misleading offers when you sell your mortgage (continued)
A variation goes as follows:
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.
(If you do not understand these terms check
our mortgage and real estate dictionary)
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.
As you will see, the yield to the note buyer is a staggering 29.95% p.a.
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.
