When it comes to obtaining a mortgage loan, an individual has many more options than he may have thought of. There is the conventional bank loan where most people go to find the money for their purchases and then there is the less known promissory note buyer. This type of investment strays from the traditional in that both buyer and seller can basically create their own investment deal outside of the stringent requirements that are evident in the banking industry today. Mortgages come in all different shapes and sizes and you will probably need a convenient note buyers guide to help you to fully understand each type and how they work; this will help you to decide on the right investment tool for you. Searching online can give you lots of information and could be very beneficial for those new to note buying. Still, if you are thinking about buying a private note, then here are a few basic things to get you started:
Seller Financing
This type of financing is popular with real estate note buyers and is very common among investors. When a particular seller agrees to lend a purchaser the necessary funds to purchase a home, this amount could include the total purchase price or the amount owed after a down payment has been made. In this type of loan, the principle and interest payments are structured to be amortized over a period of time that could range anywhere from 5 to 30 years. Usually with a 5-year loan, the borrower is expected to make a substantial balloon payment to cover the remaining balance. The thought here is that the borrower will be able to secure conventional financing from an institution or another lender at the end of the term. If for some reason the borrower is not able to meet that final payment or defaults on his payments before the final payment is due, the investor can foreclose on the sale and acquire the property for himself.
These types of loans are very popular for those who are unable to secure traditional loans from an institution; self-employed, retirees, or those with a negative credit rating are more likely to take advantage of this type of loan.
Private Mortgage Loans
Another avenue that many investors use are the private mortgages; these are created with private lenders that lend money at above-market interest rates. In these types of loans, the property is generally held as a collateral in case the purchaser defaults at any time. Generally, those that avail themselves of these private note buyers, such as Texas note buyers are those that may be considered at high risk for the traditional financial institution. If you choose to take advantage of this type of investment, it is important to carefully select your investment option; you’ll want to be sure that the borrower is capable of repaying the loan and that the property’s condition is in line with the current property value. If for any reason, the note buyer has to foreclose, you will want to make sure that you have a means of recouping your investment.
Another reason why this type of loan is so popular has to do with their higher than average interest rates. This makes them very attractive investments to hold onto; however, that does not mean that they can’t be sold off to a third party if there is ever a need for immediate cash.
Time Value of Money
It is important to take into consideration the idea of “time value of money”, since this controls how much you would be able to invest. When you, the seller, are ready to sell your note to a third party the price you sell it for is determined not by the outstanding balance on the loan but on the current value of the property itself. Factors have to be figured in the equation such as property condition, borrower’s financial status, and the outstanding balance among other things. The formula for determining the price of a note can be rather complicated, but there are many resources online to help you figure it out.
Real estate note buyers are a unique group of people that know how to take risks and make money from it. They are savvy investors who can tailor make a financial package for anyone that may need it. In light of the way that the economy is changing, it is only realistic that the way people buy property changes with it. Taking the time to learn all about investing in promissory notes can make a major difference in your real estate portfolio and certainly represents a major increase in your profit potential.
