Partial purchase of a mortgage.

It is possible to buy just part of the payments, after you have received the payments you have bought, the balance of the mortgage reverts to the original owner.

As a mortgage buyer, you should ask for a first right of refusal to purchase the balance of the mortgage if the seller ever decides to sell it.

You could for example buy the first 120 payments when there are 240 payments still due. Or, if the mortgage has a balloon in it, you may want to buy the payments only and let the balloon revert to the original mortgage owner.

Example: A vacant land mortgage has the following terms: Appraised value of land is $120,000. The mortgage is for $100,000 with a 30-year amortization and a 5-year balloon. The interest rate is 11.5% per year and 6 payments have been made.

Using our financial calculator for payments, you determine that the monthly payments are $990.38 per month.

Using our financial calculator for balance left you determine there the balance after 6 payments have been made is $99,805.19. (Hint, if the amortization period is 30 years = 360 months, solve for 354 payments). Or you could just review or print an amortization schedule.

After 59 payments of $990.39 have been made, the total balance is payable in full with the 60th payment. Using our financial calculator you calculate that the balance left after 60 payments have been made is $97,430.29 (plus the 60th payment of $990.38 for a  total payment of $98,420.67) Hint. As the amortization period is 360 months, solve for 300 payments, that is 360 minus 60).

You decide to buy the next 53 payments of $990.39 and the original lender will  receive the last (60th) payment of $98,420.68. The yield is already 11.5% per year and you offer to pay $40,590.59, which will yield you 12% per year. You can check the calculations using our discount calculator.

You will note you have an excellent and safe Investment to Value ratio of 34%. (That is: money invested divided by appraised value =  40,590 / 120,000).

In the event of a forced sale due to a foreclosure or early payoff, you get paid first. Whatever is left goes to the owner of the balloon.

What should you receive in the event of a foreclosure? The capitalized value of the payment stream you purchased. Let's say the loan goes into foreclosure after you have collected 30 of the 53 payments you bought. Using our financial calculator, you will see the capitalized value of the 23 payments left is $20,356.20. Hint, the interest rate is 11.5% and the payment is $990.38, as per the original note. .

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Evaluating foreclosure risk
How much could you lose if the loan goes into foreclosure

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