QUESTION: In June 1975, I sold a house I had in Maryland for $28,000. I took back a first mortgage of $25,000 for 30 years at 7 3/4 percent interest. I now realize that was a big mistake, considering my age. My wife died a few years ago, and I now find that I could use the money. The purchasers are not the best at making payments, and they are never on time. I was told that there is some organization that will buy mortgages. There is about $21,000 still owing. Can you advise?
ANSWER: There has been a lot of talk about lenders purchasing promissory notes such as yours, but quite frankly I have found a lot of reluctance on the part of lenders to purchase those notes.
I called the Federal Home Loan Mortgage Corp. and the Federal National Mortgage Association to discuss this directly with them, but they say you have to contact your own lender.
Obviously, this is of little help to you.
Because your mortgage only carries an interest rate of 7 3/4 percent, it is very unattractive in today's economy. If you are able to find anyone at all who would be interested in purchasing the note, I suspect that you will have to give a very deep discount. This means that you may have to sell the note for as little as $10,000 to $13,000. Although you may want to consider this possibility, I certainly cannot recommend the discount, because, in effect, you would be giving away a lot of your money.
You may want to talk to your own bank, and see if they will lend you money on the strength of that promissory note. Some banks--especially if you have had a good relationship with them over the years--will be willing to take your note as a pledge (collateral) and make you a new loan for the amount that you need. However, at your age, this also may be difficult.
You should contact your purchasers (the maker of the note) to see if they would be interested in refinancing, thereby paying you off earlier than the year 2005. While at first blush, one might ask why should they get rid of a 7 3/4 percent interest rate, there certainly are tax benefits for the note makers if they refinance. Also, they could pull some of their debt equity out of the property, which they may be able to use to their advantage.
As a sweetener, you might want to offer them a discount, but of course it would not be as great as you would be giving if you went to a third-party lender who purchased your note. For example, you have indicated that there is about $21,000 still owing on the note. Perhaps your purchasers would be willing to pay you off for $17,000, which means that, although you will not get the full value of your money, you certainly will get it today, and, of course, at your age this is very significant for you. More importantly, you would be using these dollars in today's economy and at today's rate, rather than having to get the monthly payments in small installments.
You have indicated that your purchasers are not paying on time. You should let them know that if this continues, you will take appropriate legal action, which could include foreclosing on the property or suing them under the note. Perhaps this additional pressure will convince your purchasers that you mean business, and that maybe it is high time for them to pay you off and refinance.
This is a very good time to refinance, because all of the experts (and even some of the fortune tellers) are predicting that interest rates gradually will start to climb.