Your Own Real Estate Is Your Best Investment
You probably have heard the concept of making extra principal payments to reduce interest and payoff your mortgage early. The concept may be simple, but it is often overlooked and rarely practiced. A typical promissory note amounts to incredible interest over thirty years. For example, on a thirty year $100,000 loan at 9%, you will pay over $189,000 in interest.
If you have a positive cash flow on your rental properties, consider using it to make extra principle payments. By making extra principle payments, even small ones, you can save significantly on interest. This is because interest is charged on the outstanding balance owed. For example, if you paid an extra $50/month the loan described above, you would save $49,000 in interest and pay off the loan balance six years earlier. If you paid an extra $100 per month, you would save over $75,000 in interest and pay off the balance ten years earlier.
Save Money on Late Fees
If you are in danger of paying your mortgage late, send your payment via overnight mail. The cost of doing so is probably much less than your late payment. For example, a 5% late penalty on a $1,000 payment is $50. Sending the payment via Federal Express will cost you less than $15.
A Few Tips if You are Holding a Mortgage in Default
If you sold a property and took back a mortgage (or you bought an existing mortgage), you have an alternative to the foreclosure procedure . . . sue on the promissory note. Remember that a mortgage is security for a note, and you can always forego the foreclose proceeding and sue the borrower directly for nonpayment on the note. This may be desirable if the property has little equity and the borrower has other assets to attach. Keep in mind, however, that you have to elect one remedy or the other; once you choose to sue on the promissory note, you waive your right to foreclose the property (and vice-versa).
Watch for Bankruptcy
A borrower in default can run into federal court and file for bankruptcy to stop your foreclosure proceeding. Once the federal bankruptcy petition is filed, the state court foreclosure proceeding is subject to an automatic “stay” (which means you must stop all collection efforts). This will delay your foreclosure, but not deprive you of your rights. As a secured creditor you will have first crack at the property over unsecured creditors (credit card debtors, etc.). Simply have your attorney march into federal court and ask the judge to have the stay lifted against you. However, if the debtor files for chapter 13 reorganization, he may be able to ask the court to force you to accept a payout plan. Either way you will get paid, even if it means having to wait.
Consider a “Deed in Lieu of”
If you are in a mortgage state, a borrower can delay the proceeding for months by simply filing an answer to the complaint, raising any number of defenses, including improper service of the summons. If you are on speaking terms with the borrower, try and work it out. It may be cheaper for you to waive the back payments and even pay him to give you a deed in lieu of foreclose. That is, he gives you the property back and you spare him the embarrassment and credit devastation of a foreclosure (as well as a possible deficiency judgment against him). Time is money when it comes to foreclosure, so use it wisely!