If you hold a note and need cash, you have options. You can borrow. Or you can sell part of your note. I buy notes, so you might expect me to say "sell." The honest answer is it depends on what the money costs you and what you can live with.
Here's how to compare them.
Short version: A partial sale costs about what a loan at the buyer's rate would cost. If you can borrow for less, a loan is cheaper in dollars. A partial wins when you don't want a new monthly payment, a credit check, or a loan against your house.
What a partial sale really costs
With a partial, you sell a set number of payments for less than their face value. The gap is your cost.
Example: You need $20,000. Your note pays $592.50 a month. A buyer wants a 12% return. You'd sell 42 payments, worth $24,885 in total, for about $20,200.
- Payments you give up: $24,885
- Cash you get: about $20,200
- Cost: about $4,650, plus closing costs
A $20,000 loan at 12% paid off over the same 42 months would cost about the same in interest. That's the key idea. A partial costs about what a loan at the buyer's rate would cost.
For more examples, see how many payments it takes for the cash you need.
The big difference: who makes the payments
With a loan, you make the payments. Every month, out of your pocket.
With a partial, your payer makes the payments, same as always. They just go to the buyer for a while. You don't write a single check.
That's the part people miss. If your note check covers part of your bills, a partial pauses that income. A loan keeps the income and adds a bill. Either way, your monthly budget takes the hit. The question is which one you'd rather have.
How the options compare
| Partial note sale | Personal loan | Credit card | Home equity loan or HELOC | 401(k) loan | |
|---|---|---|---|---|---|
| Credit check | No | Yes | Already have it | Yes | No |
| New monthly payment | No | Yes | Yes | Yes | Yes, from your paycheck |
| Debt on your credit report | No | Yes | Yes | Yes | No |
| Your house at risk | No | No | No | Yes | No |
| Typical cost | Buyer's rate plus closing costs | Varies by credit | Often high | Often lower | Lost growth on your savings |
| Time to cash | About 4 to 5 weeks | Days | Right away | Weeks | Days to weeks |
Rates change all the time, so check today's rates before you decide.
When a loan is the better choice
- You have strong credit and can get a low rate.
- You already have a HELOC open at a low rate and you're comfortable using it.
- You need cash in days, not weeks.
- The amount is small. Closing costs on a partial are about the same for $5,000 as for $40,000.
When a partial is the better choice
- You don't want another monthly payment. The payer covers it.
- Your credit isn't great, or you don't want a credit check.
- You don't want to borrow against your home.
- You're retired and don't want new debt.
- You'd rather not touch your retirement savings.
Questions to ask yourself
- What's the lowest rate I can borrow at today?
- Can my budget handle a new monthly payment?
- Can my budget handle the note check stopping for a while?
- Do I want this to show up on my credit?
- How fast do I need the money?
If the loan is cheaper and you can handle the payment, borrow. I'd tell you the same thing on the phone. If not, a partial may be the cleaner way to get the cash.
Frequently asked questions
Can I borrow against my mortgage note?
Sometimes, but it's not common. Few lenders make loans secured by a private note. For most people, a partial sale is the simpler way to get cash out of a note.
Is a partial note sale a loan?
No. You're selling a set number of payments. You don't owe anyone anything, and there's no monthly bill.
Does a partial sale hurt my credit?
No. There's no credit check and nothing reported to the credit bureaus.
Which is cheaper, a partial or a personal loan?
It depends on the rates. If you can borrow below the note buyer's rate, the loan usually costs less. If your loan rate would be higher, the partial may cost less.
What happens if my payer stops paying during a partial?
The buyer owns those payments and handles collection during that stretch. Ask how it works before you sign. See partial note sales explained.
Want to see your own numbers? Try the note value calculator or get two free offers.
Larry has invested in real estate since 2006 and has bought more than 300 mortgage notes. He runs LJH Investments, LLC, an Ohio company based in Madison, Indiana. More about Larry
This article is general information, not legal or tax advice. Laws change. Talk with your own attorney and tax adviser about your situation.