Buy a Discounted Note and Lower Your House Payment at the Same Time

The following is another illustration on how to use the financial calculator to create profits in both notes and real estate.

The strategy discussed here is illustrative of ways to manipulate your own mortgage. Even if you don’t do this exact strategy, it should stimulate you to think of ways to handle your own debt.

Once you understand the basic premise of buying discounted notes and have some notes in your portfolio, you have some remarkable options, particularly in dealing with your own home mortgage.

You own a home valued at $300,000 and owe $20,000 on a first mortgage. Assume you can borrow $180,000 at 3% interest rate amortized over 30 years. Your old house payment was only $190.46. From the $180,000 refinance, you net $160,000 after paying off your current $20,000 first mortgage.

What is your new house payment?

Box #1: Clear your calculator. Calculate the Pmt

N I PV PMT FV
360 3 -180,000.00 _____ 0

Wow! Your old payment was only $190.46; but your new payment is $758.89. You must pay $568.43 more each month! Your spouse is not happy! You should carefully explain your next step.

Sally Seller offers you the following note at a 14% yield. It is secured by a two-unit flat in San Francisco and was purchased by Paul Payor two years ago. Sally carried back a $235,000, 8%, 360 month loan. Paul Payor has been making the payments regularly. Sally has a unique opportunity to open an earring shop on Fisherman’s Wharf and this note is her only asset.

What is the balance due on the note to Sally Seller after Paul Payor has made 24 payments?

Use the PV method. Put the payments remaining into N.

Box #2: Calculate the PV

N I PV PMT FV
336 8 $____ 1,724.35 0
This is the balance due owed by Paul Payor after he has made 24 payments and this is the note Sally wants to sell to you.
 

The note you are buying has a Present Value of $230.911. You need a 14% yield. How much will you give Sally Seller for Paul Payor’s payment stream?

Box #3: Calculate the PV

N I PV PMT FV
336 14% $___ 1,724.35 0
This is the note you can buy for a 14% yield

You will give Sally $144,801.59 for her note. She is happy to sell the whole note in this case, because you skillfully explain to her that long-term notes are not worth very much. You show her what a car that costs about $14,000 today will cost in 28 years assuming a 5% inflation rate between now and then.

Box #4: What will a $14,000 automobile cost in 28 years, assuming 5% inflation? Calculate the FV

N I PV PMT FV
336 (28 years) 5% (14,000) 0 $____

Similarly, you skillfully explain that a $2.49 hamburger today will cost $10.07 in 28 years. That is why she must take this large discount. Caught between your powerful logic and the lure of the selling earrings on Fisherman’s Wharf, Sally agrees to sell you her note for $144,801.59.

Remember, you owe the bank $758.89 per month, but Paul Payor’s note, purchased from Sally Seller, will pay you $1,724.35 each month. You now have a positive cash flow of $965.46 per month AND your net check on the refinance was $180,000 (less closing costs) so you have an additional $35,198 to either take your spouse on a cruise or, more wisely, to invest in a small land note.

OR, if your spouse is unreasonable, you could use the extra money to pay down your mortgage with no increase in the monthly payments. You will pay off your home mortgage in a little under 132 months or just under 11 years and save $64,342 in interest! After that, the $1,724.35 monthly payments are all profit to you AND your home will be paid off AND you had the use of $35,198. MOREOVER, the money you borrowed on your home was tax deductible, so you lowered your effective income tax as well and your spouse is happy! We will leave these calculations for you to ponder, or you can go through the “Supererarnings” component of the Master Cash Flow Specialist Network program to prove these figures.

What You Have Learned: By borrowing at one rate of interest (on your house, for example) and buying a note yielding a higher rate of interest, you have many money-making options.

Box # 1: Pmt = 758.89
Box # 2: PV = –$230,911
Box # 3: PV = –$144,801.59
Box # 4: FV = $56,607.91

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