Use a Stepped Payment Note

© 2007 by Bill Broadbent, S.E.C.-CCIM

What is a stepped payment note?

A stepped payment note has a fixed rate of interest but the payments increase annually either by a fixed dollar amount or by a percentage.

Stepped payment notes offer buyers and sellers three major benefits.

1)     They can diffuse or eliminate balloon payments.

2)     They give the holder of a long term note more dollars to spend as time goes on. This can be important for older people who need more spendable dollars in order to keep pace with inflation.

3)     It shortens the amortization period on long term notes making them more acceptable to people who may hold them. e.g. Starting with a 30 yr. payment and 5% annual increase in payment the note will amortize in about 17years.

Why aren’t stepped payments used more often?

The biggest obstacle to stepped payments may be that it was difficult to produce an amortization schedule. Now  a simple, inexpensive (PC) program calculates stepped payments either by a flat dollar increase (annually) or by a percentage increase (annually) in the regular payment. It also computes any future balloon payment and produces an amortization schedule. It includes a column of boxes called “Date Paid” which the note holder can use to record the payments as they are received. This payment history is valuable in the event the note holder ever decides to sell the note.

In the event the note holder decides to sell his note this program will produce a schedule that discounts the note to the investor’s desired yield. It will then amortize the discount over the life of the note and print a schedule that assists the note investor in reporting taxable income from his note investment.

Now that these mechanical problems have been solved more real estate agents and property sellers should learn how to properly structure seller carried notes, using stepped payments where applicable.

Bill Broadbent, S.E.C. - CCIM Real Estate Consultant Cash Flow Buyer (I LOVE SMALL NOTES) Arnett & Broadbent, Inc. (since 1961) 1380 Broad St. San Luis Obispo, CA 93401 Tel: (805)543-9102 - Fax: (805)543-9113 web: www.arnettbroadbent.com Email: bill@arnettbroadbent.com   Published courtesy of Dixie Randock, A+ Institute

Bill Broadbent

Co-author of: Owner Will Carry - How To Take Back a Note or Mortgage Without Being Taken www.arnettbroadbent.com/ownerwillcarry.html