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Full Sale
When the entire note is sold, it
is always sold at a "discount" off the current principal balance of the note. The reason for this is that the face
interest rate of the note is seldom as high as the market yield required in the secondary mortgage money market. In the example, the discount is $8,024.01 ($84,257.19 minus $76,233.18) assuming the secondary mortgage money market yield is 12%. The discount
could be more or less depending on the current yield requirements in the secondary mortgage money market. Partial Sale- Front End Payments
Partial sales are very attractive
from the point of view of a note holder because the note holder does not have to take a big discount. The main reason for
the discount being so large ($8,024.01 in the example) is that the payments due in the distant future, are worth much less
in today's dollars than the payments that are due soon.
In a full sale, the note holder is selling all the
payments, and not getting much for the ones at the end of the 15 year term-thus the large discount. In a partial sale where
the front-end or near term payments are sold, most of the payment is interest. This means that the note holder gets a sizable
amount of cash now ($40,653.34 in the example) and when the note holder gets the note back after 60 payments, the balance of the note is still fairly high ($63,736.86 in the example). The note holder then gets the remaining 96 payments of $967.14.
A partial sale of the front-end payments is
like having your cake and eating it, too. You get a sizable chunk of cash now, and when you get the note back, it has a high
remaining principal balance and lots of payments left to collect.
In the example, the cash the note holder receives now plus the remaining loan balance the note holder receives in 5 years is more than $20,000
higher than the current principal balance of the note. In many cases, note holders prefer this type of an arrangement rather
than selling the entire note for a large discount off the current principal balance.
Full Sale-Split Funding
In the split funded sale, the note holder is selling all of the payments but is only selling part of the payments now and
part of the payments in the future. This type of sale is really a hybrid between a full sale and a partial sale.
In the example, one half of the note (the next 78 payments) is sold now and the other half of the note (the last 78 payments) is sold after
the first 78 payments are paid. $48,010.47 is paid in cash now and an equal amount in 6 ½ years.
This is
only one variation of a split funded sale. The note could be split into three, four or more equal or unequal parts.
Partial Sale-One Half of Each Monthly Payment
In this type of a sale, the note holder sells only half
of each monthly payment and continues to receive the other half. This is a particularly attractive way to sell a note if you
need some cash now but also want to keep part of the monthly cash flow. The example shows that one half of each of the 156 remaining payments can be sold for $33,114.72 and $483.57 keeps coming in every month.
It is very important to take certain safety measures to ensure that your note stays as valuable as possible over
the life of your note. Learn more about Note Safety....
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