Shorter the Term Higher the interest, or vice versa for a Note? - Posted by Tony James

Posted by Michael Morrongiello on January 29, 2000 at 22:41:37:

Doug:
These are excellent clauses to include in your negotiations with a seller who has indicated they will finance you. Thanks for sharing them. I can remember when my “first right of refusal clause” that the seller and myself agreed on allowed me to purchase my own $48K +/- debt (the seller financed mortgage note) for $23K +/- when the estate that held the note wanted to liquidate it.

However, From the perspective of “brokering” a seller financed note, these clauses actually will detract from the value of the mortgage & note instruments that include them. They create uncertainty in the mind of the potential note funder. That uncertainty adds up to greater risk and as a consequence less value for the mortgage & note.

Michael Morrongiello

Shorter the Term Higher the interest, or vice versa for a Note? - Posted by Tony James

Posted by Tony James on January 29, 2000 at 19:08:11:

I want to broker notes, but I want to know the shorter I make the note, should the intererst rate be higher, or vice versa. What would be a good interest rate for a 12-18 month term compared to a 30 year note?

Shorter term = Lower interest rates, Longer term = Higher interest rates - Posted by Michael Morrongiello

Posted by Michael Morrongiello on January 29, 2000 at 20:05:08:

Tony,
In actuality the LONGER the amortizing term a note has to run the HIGHER the interest rate the note should have since it makes the note more attractive to a note funder and tends to lessen the discounting of that income stream to its present cash value.

A shorter amortizing term note with a lower interest rate does not discount as severly as a longer amortizing note witb a low interest rate on the note.

Long term paper (25 to 30 year amortization) should be written at rates in the 10% -11% range if the payor has reasonbly OK credit. IF the credit is weaker then a higher rate in the 11% - 12% range should be OK.

Another important factor to consider in evaluating the “quality” of the paper is the note payors credit. A STRONG credit payor with a low interest rate note (8.5% -9.5%) would not be as bad as having a Weak and sloppy credit payor with that rate.

Payor credit, employment, down payment, seasoning on the note, the collateral property type and upkeep, and finally the actual note terms ALL will come into play as important variable in sizing up the quality of note.

Hope this helps…

Michael Morrongiello

Re: Shorter term = Lower interest rates, Longer term = Higher interest rates - Posted by Douglas Ottersberg

Posted by Douglas Ottersberg on January 29, 2000 at 22:09:42:

Michael
…and finally the actual note terms ALL will come into play as important variable in sizing up the quality of note…
Which is why I like to get stuff like first right of refusal, substituion of collateral, etc. put into notes I’m paying on !

Doug