Loan Modification Decreases Value of Note by $30,000
When he was shocked at the discount, this is what I wrote to the note holder:
I’ve attached a partial for you to consider, which would greatly minimize your discount and still allow you to take advantage of more attractive investment opportunities that are in front of you:
- $75,474 for 120 payments
- $125, 023 approximate balance when you get the note back plus interest (166 payments @ $1,126.92 = $187,068.72)
- Total value: $200,497 (for your $167,395 note balance)
You can see that you are getting $75,474, and the note balance is only dropping by $42,372!
If there is an early pay off, you will not lose the tail end of your note, it is still there for you.
It can be hard to understand why discounts (especially on the full purchase offer) seem so high, but think about it this way…
How much did a loaf of bread cost 24 years ago? And by comparison, how much will it cost 24 years from now? Because of inflation (which is expected to increase because of all the money we’re printing) a dollar 24 years from now will probably only buy a dime’s worth of goods, if we’re lucky.
If I offered you $100 in 24 years, or $50 today, which would you take? Only accounting for 7% average inflation, that $100 in 24 years is only worth $18.95 in today’s dollars, so you’re actually getting more buying power by taking half the amount now.
If you have no way of making more than 6.25% on your money, then there is no reason to sell and take a discount, unless you need money for something important, or you just don’t want the worry of what might happen if the economy really does some crazy things down the road and your payors run into hard times, or commercial property values drop even further.
If you have a way to make more than 6.25% on your money, then you will be ahead of the game even taking a discount on the note now. There are some astounding investment opportunities right now… even average conservative investors are easily making 10-12% on their money.
If you take the $75,474 and invest it at 12% for the next 10 years, letting the money compound, you will have $249,093, which obviously more than makes up for any discount right now.
So in 10 years, you could have:
- $249,093 (from investing at 12% or better)
- $125, 023 (approximate balance when you get the note back)
- Total value: $374,116
When you look at things in this way, and you account for the time value of money, inflation, and the cost of lost opportunity to make stronger investments, you can see that you are actually losing money for your family long term by being unwilling to take a discount on a 6.25% note when you could invest your money easily at 10-12% or better.
It sounds like selling at least a 10 year partial will meet your objective of creating a strong financial future for your family.
Please don’t hesitate to call if you have any questions.
Have a great day,