A seller I've been talking with is carrying a $180k note at 9% on a house he just sold. Someone in another conversation told him his yield might be 11%, or might be 6%, depending. He thought the 9% written on the note was the answer and so did I. If the rate is printed in the document, where does a different number come from?
The 9% is the rate the borrower owes on the unpaid balance. It's a term of the contract. Yield is what the holder earns on the money they actually have in the deal, so if he created the note himself at full face value and holds it to maturity while the borrower pays, those two numbers land in the same place. They separate the moment someone pays something other than face value for it, or the loan pays off early and he has to redeploy the cash somewhere worse.
Three words sort this out. The rate written in the note is the face rate, sometimes called the coupon. Face value, or par, is the unpaid principal balance, $180k in your example. Yield is the annualized return to whoever holds the note, measured against what they paid for it.
Small numbers make it visible. Say a note has a $100,000 balance at 9%, interest only, so $9,000 a year. Hold it at par and the yield is 9%. Sell it to a note buyer for $80,000 and the buyer collects the same $9,000 on $80,000 of cash, which is an 11.25% yield. Buy it at a premium for $120,000 and the same payment stream yields 7.5%. The face rate never changed. Only the price did.
One piece your seller friend may not have priced in: yield is a number that assumes the payments arrive. A 9% note where the borrower stops paying in month eight has a yield determined by whatever the foreclosure or workout produces, and that depends on the equity cushion under the loan and on state process. The other piece is timing. If his note has a balloon in five years, most of his money comes back as one lump sum, so his real holding period is five years rather than thirty, which matters a lot when he's comparing it to other places to put capital.
The part that surprised me when I started pricing these is how much of the yield gets eaten by things outside the note. A servicer taking $25 a month is small against $180k, but it's real, and if the borrower goes 90 days late somebody has to advance the property taxes to keep a senior lien from forming. Does the 9% he's quoting even count as his return if he's the one funding those advances?