When you think of a mortgage, you probably think of it as a way to finance the purchase or refinance of a home. Mortgage notes, however, can also be an investment option where you may be able to earn a return on your investment. Buying mortgage notes may also be referred to as hard money lending or private mortgages, where personal money is being used to fund the financing of a property. In exchange for buying mortgage notes, you receive monthly principal and interest payments on the amount of the note until the note is paid in full.
Find and contact a mortgage note broker. Mortgage note brokers or private mortgage brokers act as liaisons between investors looking to buy mortgage notes and borrowers. Use the yellow pages of your local phone book to locate and contact a local mortgage broker to see if they have any mortgage notes for sale.
Write up and sign a legal contract and promissory note. When you find a mortgage note or notes you want to buy, have an attorney draw up a legal contract between you as the mortgage note buyer and the borrower or seller of the mortgage note. A real estate attorney can draw up the contract as well as the promissory note for the transaction, which both the borrower and buyer must sign and agree to before it becomes a legally binding agreement between the two parties.
Establish and fund the escrow account. After all of the terms and conditions of the mortgage note purchase are in writing, you as the buyer must establish and fund the escrow account. This is the account where you deposit the money you're loaning to the borrower for the real estate purchase. The account is managed by a third party so that the doling out of the funds from the account is fair and equitable and in accordance with the terms of the written legal agreement.
Receive your returns on your investment. Each month, on a quarterly basis or in accordance with the terms set forth in the written agreement, you receive your checks from the escrow account, which is principal and interest on your mortgage note investment. This occurs until the note comes due and is paid in full.
The rate of return for a typical mortgage note can run anywhere from 12% to 15% for a mortgage note buyer.
The escrow account is also the depository for the monthly payments made on the mortgage by the borrower. When it's time for the mortgage investor to receive his monthly payment, the funds are disbursed from the escrow account as well.