If you were to buy a $20,000 mortgage note, 15-year term, 8% interest, how would you determine the price? Would you pay $20,000? Or, would you pay less? If your investment strategy was to have each invested dollar earn 13%, you couldn’t buy that note for “full price,” since you would only be earning 8% interest.
To get your 13% return or yield, you would have to pay less than the $20,000. This is the concept of discounting mortgage notes. Though you pay less for the note, the monthly payments won’t change. They’ll still be $191.13 each month. So, the question really is: If you’re receiving payments of $191.13 for 15 years, how much must you pay to get a 13% yield? Continue reading “Discounting a Mortgage Note”