Many time, persons holding a mortgage note mistakenly believe that the value of the note is equal to the total of all mortgage payments yet-to-be received; i.e., the mortgage has a balance of $ 90,000; with 210 future payments of $ 600 each: 210 X $ 600 = $ 126,000. That value would only be true if THE WHOLE $ 126,000 was paid off today ! ( Obviously, if it was paid off today, the person paying on the mortgage note would only have to pay off the balance of $ 90,000 ).
This can best be illustrated by the "time value of money," which basically states that "a dollar in the future is worth less than a dollar today." As a simple example, suppose you were offered $ 100, to be received one year from now. If current interest rates were at 6.00%, that $ 100 would only be worth $ 94.66 today. If current interest rates were at 9.00%, that $ 100 would only be worth $ 92.11 today.
In pricing a mortgage note, one of the several calculations used by investors is to "present value" the stream of payments to be purchased, based on their required "yield" for that type / quality mortgage.
Example: $ 100,000 original note amount, 6.000% interest rate, 30 year term, payments of $ 599.55 per month.
95 payments have been made; the current balance is $ 87,932.
The Investor would be buying the remaining future 265 payments of $ 599.55 each.
- If the investor wanted / needed a yield of 6.00%, the (non-discounted) price would be $ 87,932.
- If the investor wanted / needed a yield of 6.50%, the discounted price would be $ 84,239.
- If the investor wanted / needed a yield of 7.50%, the discounted price would be $ 77,525.
Another major calculation used by the investor in determining the desired yield / price for the mortgage note is the "investment to value" ( ITV ) ratio - the dollar amount of their investment versus the actual current market value of the property. The lower that ratio is (the more equity in the property), the less risk in the investment. The lower the risk, the lower the yield needed.
As you can see, the two main factors that determine the price you will receive are: (1) the requred yield of the investor and (2) the maximum amount of money the investor will put into the transaction - that amount determined by the ITV ratio factors below.
Factors determing Risk and Quality of the Mortgage Note ( and, ultimately the Price ):
Clearly, a great number of factors come into play in pricing a mortgage note. Sellers need to be realistic in their price expectations, realizing that market conditions ( and property values ) constantly change. Is the interest rate on the note that you hold in line with current market rates ? Has the property's market value gone up or down ? Do you know the Payor's current credit score - a major factor today - with all else being equal ?
Want to know what the mortgage note YOU hold is worth ?
We would be pleased to provide you with a free, obligation Quote. To do so, we will need complete and accurate information, as detailed on our Quote Request Form.
Contact us today - You'll be glad you did !
American Funding Resources, Inc.
Palm Bay, Florida
Phone: 1-321-549-8410 Eastern time
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