How to Fund Mortgage Note Purchases: Creative Funding for Note Investors

How do you fund mortgage note purchases? Most mortgage note investors buy with cash or a self-directed retirement account, but some borrow against home equity or a life insurance policy to buy notes. Each source of capital has its own cost, limits, and risks, and borrowing only makes sense when the notes keep performing. In a recent episode of the Paperstac Podcast, Paperstac CEO Rick Allen and co-host Brett Burky walk through the funding methods Brett has used, including an all-in-one mortgage and a loan secured by a life insurance policy. This guide turns that conversation into a reference: where note-buying money can come from, how the funding cycle works, and what to ask before you borrow.

Where Does the Money Come From When You Buy a Mortgage Note?

Rick opened the episode with the basic question every investor eventually faces: how do you come up with the money for the next note? Cash and a self-directed IRA are the usual starting points. Brett has gone further, and the table below summarizes the options discussed.

What Is an All-in-One Mortgage?

Brett described converting his amortized first-position mortgage into an all-in-one, which he compared to turning the equity in the house into a personal line of credit. Lenders generally structure these loans in two phases: a draw period, often five to ten years, in which the borrower can borrow and repay repeatedly, and a repayment period when the line closes and the balance is paid down. Refi.com’s overview of first-lien HELOCs notes that the all-in-one variation can lower interest charges because deposits reduce the average daily balance.

Why use a first-position line instead of a second-position HELOC?

Brett said he previously had a second-position HELOC but switched because the amount he could borrow was capped. Lenders typically limit a combined first and second lien to a share of the home’s value, which can leave little room as an investor’s purchases grow. A first-position line sized to the home’s full borrowing limit gave him more room and less need to run close to the ceiling. His takeaway: he wanted a cushion rather than “teetering around the top.”

The Consumer Financial Protection Bureau notes that HELOCs usually carry an adjustable interest rate, and that after the draw period ends the borrower must make payments to repay the debt, which can put the home at risk if payments are missed (CFPB, 2022).

What Is Velocity Banking, and How Does It Relate to Buying Notes?

Velocity banking is the practice of using a line of credit as a cash-flow hub to pay down debt faster. Brett’s version applies the idea to note investing: instead of paying extra principal on a mortgage at around 6%, he uses the line to buy a note whose payments help repay the line, then repeats the cycle. He said his wife’s reasonable question was why he doesn’t simply pay down the mortgage, and his answer was that the same capital could earn more in a performing note.

How Does a Loan Secured by a Life Insurance Policy Work?

Brett described being introduced to an agent whose network offers loans against life insurance policies. The product was a loan of about $50,000 with a 5% rate over roughly ten years and a payment of around $530 a month, secured by a UCC filing, a personal guarantee, and the policy. Brett recalled it as an amortized loan and said that the amount available tends to track the size of the policy, along with credit and assets. These are his numbers as discussed on the episode, not a standard offering.

What happened next in Brett’s example

1. Brett used roughly $10,000 of the proceeds for personal expenses, including paying down a car loan.
2. He used about $40,000 to buy a partial of a mortgage note from a seller on the Paperstac marketplace, a note he said pays about $780 a month for about eight and a half years.
3. The difference between the note payment and the loan payment, roughly $250 a month in his account, is cash flow while both are outstanding.

What are the risks of borrowing against a life insurance policy when it comes to funding your mortgage note purchases?

If you borrow against the cash value of a permanent policy from the insurer, interest accrues and unpaid interest is added to the loan balance. If the loan is outstanding when the insured dies, the balance is subtracted from the death benefit, and a policy that lapses with an outstanding loan can have tax consequences (Protective). Ask for a policy illustration and talk with a financial professional before borrowing.

What Is the Funding Cycle Note Investors Use?

The funding cycle is a repeatable loop that turns borrowed capital and a note’s payments into the next purchase. Brett’s version has four steps:

1. Buy a note using access to capital. Draw on the line or loan to pay for a performing note or partial.
2. Collect the note’s cash flow. Payments arrive monthly, ideally from a borrower with a clean payment history.
3. Pay down the borrowing. Apply the note’s payments, plus any income you commit, to the line or loan.
4. Fund the next purchase. As the balance falls, capacity returns and you buy the next note.

Brett said he targets notes that he expects to repay the borrowed amount in about five months, and over time the cycle builds monthly income from notes that have been fully paid for. Rick called the broader goal liquidity: either it is your money or other people’s money, and eventually most investors need a way to access more capital.

What Should You Ask Before Borrowing to Buy Notes?

Borrowing turns a note investment into a leveraged one, so the questions below come before any application:

• What does the borrowing cost? Compare the rate and fees to the note’s yield, and remember that HELOC and all-in-one rates are usually adjustable.
• How easily can I access cash? Lenders can reduce or freeze some lines, and a line that is fully drawn leaves no cushion for the next opportunity.
• Is my portfolio diversified? Brett’s point was that several performing notes can keep paying the loan if one note goes non-performing.
• Is the payment history strong, and what is the seller’s track record? Brett said he looks closely at the seller or operator, often buying from the same few sellers whose documents and processes he knows.

How Do You Lower the Risk When Using Borrowed Capital?

Brett and Rick pointed to four practical habits:

• Spread the money across several notes. If one of four notes goes non-performing, the other three can keep paying the loan while you work through loss mitigation.
• Favor a documented payment history. Brett buys notes expecting short payoffs, so a record of on-time payments matters more than headline yield. He noted one note did go non-performing briefly before the borrower caught up.
• Know the seller and the story. Brett’s example of a young local couple five houses from their parents shows why he looks past the numbers to the whole picture.
• Plan the exit. If a note underperforms, you can pursue loss mitigation or resell it. Notes are less liquid than stocks and bonds, but often more liquid than physical real estate, and a marketplace like Paperstac improves practical liquidity.

Whatever the funding source, the note itself still needs the same scrutiny. Our guides to mortgage note due diligence and buying your first mortgage note in 2026 cover what to check, and how to buy mortgage notes online walks through the process.

Frequently Asked Questions

How do mortgage note investors fund their purchases?

Most note investors use cash, savings, or a self-directed retirement account. Some also borrow against home equity through a HELOC or an all-in-one mortgage, or take a loan secured by a life insurance policy. Each source has its own cost and risk, and borrowed money still has to be repaid if a note stops paying.

What is an all-in-one mortgage?

An all-in-one mortgage is a first-lien home equity line of credit that replaces the existing mortgage. The borrower draws on and repays the line as needed, and deposits can reduce the average daily balance. Rates are usually adjustable, and because the home secures the debt, missed payments can put the home at risk.

Can you use a HELOC to buy mortgage notes?

Yes, some investors use a home equity line of credit to buy notes, but it is a leveraged strategy. The line usually has an adjustable rate, the home secures the debt, and the lender can limit or freeze the line. The note’s return needs to exceed the borrowing cost, and the loan must be repayable if the note stops paying.

What is velocity banking, and does it work for note investing?

Velocity banking uses a line of credit as a cash-flow hub: borrow, buy an income-producing asset, apply its payments to the line, and repeat. For note investors, the line funds a note and the note’s payments repay the line. It only works when the note’s return beats your borrowing cost after delays and fees.

Can you buy a mortgage note with a life insurance loan?

Some investors do. A lender may advance money secured by a life insurance policy plus other collateral, which is different from a policy loan taken directly from the insurer. Either way, unpaid balances can reduce the policy’s value or death benefit, so compare terms and consult a financial professional first.

What are the risks of borrowing to buy notes?

The main risk is that the loan comes due whether or not the note keeps paying. A note can go non-performing, a fund can fail, rates on a HELOC can rise, and a lender can reduce or freeze a line. Borrow only what you could repay if a note stopped paying, and diversify across several notes.

How does diversification reduce risk when you borrow to buy notes?

Spreading capital across several performing notes means one problem note does not stop all of your cash flow. In the episode, Brett described how three of four notes can keep paying while one is resolved through loss mitigation or resold. Diversification lowers the risk but does not remove it.

Where can I buy performing mortgage notes?

Investors buy performing notes through direct sellers, funds, and online marketplaces. On Paperstac, sellers list performing and non-performing notes and buyers can review the details, payment history, and documents before making an offer. Always complete due diligence on the borrower, property, and paperwork before you buy.

This article is for educational purposes only and is not legal, tax, financial, or investment advice. Borrowing to invest adds risk, including the risk of losing your home or other collateral. The loan terms and figures described are one investor’s examples from a podcast conversation and are not an offer or a typical result. Consult a qualified attorney, CPA, and financial professional before borrowing to buy mortgage notes. © 2026 Paperstac. All rights reserved.