What if partial pays off early - Posted by David S.

Posted by David Alexander on January 15, 2001 at 16:14:46:

20k face @ 12%, 180N w/ payments of 240.03

Current present value is 18,275.48

The next 60 months payments bought at $5500 give you a yeild of 47 and some change %, if it pay offs in 6 the present value of the note will be $17,923.10, you will owed $5,342.95 and the seller will get the remainder or $12,580.15.

The best book I’ve read teaching calculator gymnastics is Invest in Debt by Jimmy Napier. I spent one saturday reading and learning the calc with that book and after that it was all very clear.

David Alexander

What if partial pays off early - Posted by David S.

Posted by David S. on January 15, 2001 at 24:30:49:

Taking an example from one of the cash flow articles on mobile home paper:
Face value - $20,000
Int. 12%
180 payments of $240.03
36 payments have been made with 144 remaining. I buy the next 60 payments for $5,500.

If for some reason the payor pays off the note in 6 months (inheritance, refi), what do I get and what does the seller get out of the payoff?

Thanks for the help in understanding this scenario.

David in Henderson, NV

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,
Michael Morrongiello