I’m assuming you are buying 1/3 interest in an existing mortgage, if this is the case you of course are going to be taking an assignment of that existing mortgage and your assignment will be of record.
However in order to really protect yourself in case of an early payoff I would suggest that you use a third party servicing agent who would be responsible for distributing the funds should a payoff be made.
If I buy 1/3 rd of a mortgage for 1/3 rd of the amortization time for 1/3 of principal, what clause should I put in to protect my interest in case of early payoff?
Posted by Jon Richards on November 08, 2000 at 13:35:35:
The comments by Cindy Irish and Mike Morrongiello, two of the most experienced professionals in the business, are right on target. Early payoff of partial purchases has interesting ramifications.
You should go to our site at www.noteworthyusa.com, click on “about the business” and navigate to the article called the “Dreaded Schedule B” which will explain the issue better than we can by email.
Interestingly, buying 1/3 of the payments for 1/3 of the balance will pay you triple the face interest rate on the note. AND buying 1/4 of the payments for 1/4 of the balance will pay you four times the face interest rate…etc. Cool!
Whenever you purchase a “PARTIAL” interest in a note (which is what is appears you wish to do), you should have some sort of contractural agreement (a note partial purchase agreement) with the note seller that addresses issues like default, early prepayment, costs to protect the collateral, etc.
One favored way to represent your interest and to make sure you collect everything entitled to you is to prepare and represent to the note seller YOUR partial interest in the note by preparing a seperate amortization schedule (sometimes called a “B” schedule). This can easily be prepared by taking the actual note interest rate, the note payment amount, the # of months being purchased, and developing a “Present Value” or amount purchase figure. That present value or amount purchased figure is what you are then entitled to receive in the event of an early payoff of the entire note prior to you collecting all of the payments that you purchased under your PARTIAL purchase agreement.