What Do High-Interest Rates Mean To Notes?
At the writing of this blog, residential mortgage interest rates are hovering at slightly over 7% for the national average. This is a shock to the economy and to home buyers who have become accustomed to historically low-interest rates over the past decade. From the summer of 2022, interest rates had begun to more than double from the low 2% range in 2021.
In the secondary mortgage space, however, the 7% rate is par for many of the loans not backed by a traditional bank. Aside from institutional loans that were originated by a traditional bank, loans like seller-financed loans have even higher rates than 7%. So, a low-interest rate of 4% may not be attractive to some investors, but it’s great for the borrower because they can realize lower interest and mortgage payments.
But don’t discount lower rates altogether! Because if there is a high dollar-value loan, the interest can be significant. For instance, if you had a loan of $250k on a 15-year mortgage with a 4% rate, the principal and interest payments are about $1,849 a month. If an investor
is just looking to collect passive payments, that’s a pretty good number to boost your retirement account. Remember, as a note investor, you are collecting the interest AND the principal!
Seller-financed loans typically higher interest because the investor is usually taking all of the risk and there is no federal insurance backing like traditional banks. I have seen many loans out there with rates as high as 12% and close to 13%! Of course, they’re usually smaller dollar-value loans but still make for a great passive income stream if it’s performing steadily. Let’s look at a smaller loan for $50k. A small loan like this for $50k, 10-year mortgage with a 9% rate will get you about $633 a month in principal and interest payments. That’s not bad. Now multiply that by five loans, and it will give you $3,165 a month!
I forgot to mention, the loans are bought at a discount too, so there is even more yield gained on your investment! Consider buying notes in your Self-Directed IRA. This strategy will be very powerful in building your retirement nest egg, and you have all the control to invest in you. If you have notes to sell, feel free to reach out to firstname.lastname@example.org.