Re: What if partial pays off early - Posted by Michael Morrongiello
Posted by Michael Morrongiello on January 15, 2001 at 22:59:09:
When you purchase a PARTIAL interest in a note, you should referenced your interest and what your are due in the event of an early payoff, default, etc. - Industry insiders often refer to this as “the note investor schedule B”
There are several ways to do this;
One way is to simply preserve your yield in the event of an early payoff. As David A. says your yield for the purchase of 60 installments of $240.03 investing $5,500.00 is 47.20%. However this is a YTD or yield to maturity. So if you simply prepare an amortization schedule representing the 60 months and that return, you can see what you would be entitle to collect as your portion of the note in the event of an early payoff of the entire note. In six months that amount would be $5,342.95 due to you on your PARTIAL balance still due. The difference between what the note balance would be at that time ($17,923.10 with 138 remaining payments) and your partial balance ($5,342.95) would go to the note seller ($12,580.15). This preserves your yield of 47.20%. However using this method you really have not picked up any “discount” when the note is paid off early.
Another method that is favored by most funders of notes who are investing their funds for a combination of BOTH yield and discount is to prepare an amortization schedule that is based upon a “Present Value of an amount purchased” - this is represented by taking the # of payments purchased (60), the note interest rate (12%), the payment amount on the note ($240.03) and arriving at a Present value or amount purchased ($10,790.72) that you are entitle to collect in the event the note pays off earlier than the 60 installments you are to collect.
Using this method, after 6 months you are the purchaser of the 60 month PARTIAL would be entitle to collect $9,977.88 leaving the note seller $7,945.22 as his/her portion of the $17,923.10 actual note balance after 6 payments had been paid.
Now your return reflects a preservation of yield and also you have picked up some discount in the event of early payoff.
To your success,