HOW TO GET CASH OUT OF THAT MORTGAGE 
YOU ARE HOLDING

When was the last time you went through your attic, found some old piece of junk that you wanted to get rid of and so you donated it to the local thrift shop only to see something just like it a week or two later for sale in an antique store for ten times what you thought it was worth? 

Chances are that all of us have something around the house that we think is unsellable but which may actually be worth quite a bit.    Many people have an asset in their "financial attic" which can be worth thousands in cash to them.  But most won't do anything with it simply because they aren't sure of their options or for that matter that they even have any options. 

The asset I'm talking about is known in real estate circles as a "seller carry back" mortgage.   There are as many reasons for sellers to carry back financing as there are houses sold that way.  Fact is, you may have preferred to have gotten all cash for your equity but had to settle for less.  So now it's a few months or years later and you are receiving regular monthly payments.

But you might prefer to have cash instead of those payments. There are any number of sound reasons to want that, other than the psychological comfort of having your money in hand.  First of all, do you have an emergency fund?  You should, you know.  Many financial planners strongly advise you to have 2 to 3 months income stashed away where you can get to it at a moment's notice should an emergency arise.  While owning the mortgage from your previous house may be a good investment in many ways,

it is a long-term investment, to be sure.  Seller carry back notes usually run no longer than 5 to 7 years, but do you know any banks selling CDs that have a 7-year maturity date?  Most of us don't have the resources to tie up our money for that length of time.  Especially not thousands of dollars.

And while notes may be attractive investments, each of us has his own specific investment needs and your mortgage may not meet those needs adequately.  Besides, at the time you accepted the mortgage, did you think of it as making an investment? Probably not.  You were doing what it took to sell your house, that's all.  But believe me, you were making an investment.  And in all probability a very big one.

But investing that money in something other than a mortgage or deed of trust may have better suited your needs.  You may have been able to use it as the down payment on a better house than you are living in now.

Another reason you may want to liquidate your mortgage is because the property is in another state.  No matter how good that young couple looked who bought your house, what if they got into trouble financially?  Are you willing to go through foreclosure against them?

If you are in a second position (held back a second mortgage) or even a third, there are other people waiting in line in front of you to get their money at the foreclosure auction.  You could get stuck and stuck badly unless you are willing to step in and pay off the underlying loans.  Do you have the money to do that?  Do you WANT to do that? 

Maybe the people making the payments are always late and you are tired of dealing with them. Or worse yet, maybe they are already in serious default and you don't know what to do.  You know there is plenty of equity in the home over and above your position in it but you just don't have the heart to evict them.  Or you don't know what to expect. There are ways you could restructure the note to lower the payments that could prevent you from having to foreclose, but do you know how to do that?  And would you be willing to accept a lower monthly payment anyway?  Not if you are using those payments to meet some monthly obligation of your own.

There are a lot of reasons you may want to consider liquidating your mortgage note.  The good news is that there is more than one option open to you for going about that.  Before you start trying to consider them, however, you need to know what your mortgage is worth. You probably believe your note is worth the amount of the remaining principal.  If it is an interest-only note that amount would be equal to the face amount of the loan, the amount you originally lent. Otherwise the amount owed to you has been steadily and slowly paid off, amortized, as you have received your monthly payments.

If the loan is an amortized loan there are basically two categories that it may fall into.  It may be fully amortized in which case the monthly payments do not change and continue until the principal is paid in full.

Or it may contain a balloon after a few years.

What is your mortgage worth?  Is it worth the balloon amount, or the amount of the remaining principal?  None of the above.  You must understand this and understand it well before you go about liquidating your paper.  Like so many other things, it is only worth what someone will pay you for it.  That bears repeating.  Your note is worth only what someone will pay you for it.

My mother collected Christmas plates for many years.  The catalogues would tell her that some of those plates were worth $500 or more.  But just try to find someone who would pay $500 for one of them!  They were worth what they would bring, no more.

Here are some of the factors that an investor may look at in determining what he would offer you for your mortgage.  1) The size of the payments.2) How many of them there are and when they are due, including balloons. The sooner the payments are due the more your note is worth.  3) How much equity is there in the property above your position?  4) How desirable is the property?  I advise any investor not to buy paper on any property he wouldn't mind owning for that amount.  5) That brings us to the location of the property. Many investors won't invest in notes secured by out of state properties.  Many won't consider paper on properties in any state whose economy is in a slump right now.  Also the more distant or remote the location the property, or the slower the real estate market is in that area, the less your mortgage may be worth.

Finally there is the matter of the people who bought your house.  6) Are they solvent? 7) Have they made all their payments on time?  8) Are they in default now?  Some investors will take notes in default if they like the property enough and would like to own it.  But they are going to invest a lot less in that note than they would in one which is healthy. In general, anything which means that an investor is going to take a long time getting his money back, or may have difficulty in doing so is going to drive the value of your note down.

You may be able to borrow against your mortgage instead of selling it. There are some disadvantages to you in doing so, however.  They are the same ones you would expect to run into in obtaining any loan.  First of all there is the application process, which can be a headache in itself.  A lender may charge you loan processing fees, your credit will be checked, you'll have to visit the bank and fill out documents, that sort of thing. When pledging a mortgage as security you may have to wait longer to get approval also.  Bankers are generally cautious and may be a little uneasy about lending against another loan due to the level of complication involved.

And even after all that you may not get a loan.  All the banks I have spoken with about this made it perfectly clear that unless the mortgage is extremely valuable, like one secured by a downtown block in Manhattan, don't expect to get a loan on the strength of the mortgage.  You will only get a loan based on the strength of your own finances.  The financial status of the mortgage payors and the value of the property is really secondary.

That brings us to the second disadvantage to getting a loan.  That is that it places you in the line of liability for the bank to try to recover its investment should the mortgage you are holding go into default.  In other words, if the payors quit sending you the monthly payment, will you still be able to make the payments to the bank?  If not, you may be in for a surprise.  The bank will repossess the mortgage, but if they are unable to get their money out of the property securing that mortgage they may choose to come after your home as well.  They may choose to attach your personal assets to try to recover their money.  Many banks I have talked to made it clear that if you defaulted on your payments to them that the FIRST place they are going to come looking for their money is you, not the property securing your loan.

Another problem could be that the bank may want to charge you a higher interest rate than you are receiving on the note.  If you wrote the loan at, say, 8% the bank may charge you a couple of points higher interest rate.  The interest rate will depend, in part, on your credit-worthiness. You may have to continue to handle the checks coming in from the payors while your loan to the bank is being paid off.  However the payments could be assigned directly to the bank.  If they are equal to the payments you are making to the bank this could work out to be quite convenient.  The ways a bank will choose to structure such a loan is entirely up to the bank and depends on how you look to them as a credit risk.

There is some good news about borrowing against your mortgage.  You should not have much trouble in finding a bank that will consider making such a loan if your credit is good.  Most of them will, especially if they think that they can lure you as a customer. Nothing wrong with that.  Obviously the place to start looking is with your own banker.

 hese considerations may or may not be important to you, but you do have another option available.  You can sell your mortgage, in its entirety or just parts of it.  In looking into this option there are factors to consider as well.  The advantages are that first, you don't have to risk your own assets.  If the sale is written properly you can be released from all obligation if the mortgage goes into default.  This needs to be specified in the Contract for Sale and the Assignment of Deed of Trust. You may want to consult an experienced real estate attorney about this before carrying through with a sale.

You will no longer have to handle monthly checks or worry about late payments, or extra payment, or early payoff.  Also the approval process is much simpler and can be practically instantaneous.  You won't have to report interest earnings on the mortgage, and you will have no amortization schedules to worry about.

You will of course lose the interest you are earning on the mortgage note. However, you may recover it by investing the funds in another vehicle and may even get a higher return.

But to be sure, the most important drawback in selling your mortgage note is the discount.  Like I said, mortgage notes are is worth what they bring.  The market for trading in mortgage notes is a discount market. Unless you have written your loan at a high interest rate, look to have to discount it in order to sell it.

So who will buy your mortgage?  AEGIS Financial Solutions, Inc. is a private investor located in Fredericksburg, VA, with years of experience in purchasing seller-held mortgages and deeds of trust.  Chances are that we can put cash in your hand within a couple of weeks!  If you need a specific amount of cash for another investment, a child's education, a vacation, or any other purpose, ask us about buying PART of your mortgage. That is something many investors cannot do.  You might find that an attractive alternative!

Use your imagination.  If you think of your mortgage as cash-in-hand you can think up all sorts of ways to use it.  You simply must look for someone willing to accept it as such.  Once you do there is no end to the possibilities for using it.  But you won't find anyone like that unless you ask.