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Misleading offers when you sell your noteOne slightly misleading offer 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 you own are: 10% p.a. interest, 360 month (30 year) amortization with a balloon of the principal after 120 months (10 years). The payments are $789.85 a month. The balloon payment is $81,847.96. (If you do not understand these terms check our mortgage and real estate dictionary) The note buyer offers you $43,000 in cash now and lets you keep the balloon of $81,847. He /she tells you that you have now got almost $125,000 for your $90,000 mortgage note. This is not as good a deal as it looks.
How about the $81,847 balloon that you keep? What he /she forget to mention is that you have to wait 10 years to get your money, and are earning no interest on it in the meantime. Now this is true whether or not you sell your note. What is not true is that you end up with more money. You don't. The same applies if the mortgages is for a full 30 years and you get to keep the last 240 payments (20 years). What's more, this is a very safe deal for the note buyer, their investment of $43,000 is secured by an asset worth $100,000. An investment to value ratio of 43%. 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 may find that the note buyer is entitled to recover their full 18.54% yield on the mortgage even if the loan pays off in one year and that you do not get your full balloon payment. Ask what will happen in the event of an early pay-off and ask that it be put in writing. |