« $20,000 price reduction on 2426 Lower Rd.! | Main | Just sold 807 Pleasant Pl. »
Financial planning 2010
By Marla Jensen | February 21, 2010
Mortgage investments
The banks make most of their profits from basic home mortgages. Why not you? If you have money to invest, then you already know the value of real estate. And at one time you probably had a mortgage. So you already know the components of “Mortgage Investments.”
A mortgage investment is an easy investment to understand. There is no variety of choices like oil and gold, auto and computer companies, plants and animal products and no “roller coaster” long-term wait. A mortgage is a legal contract between a borrower and a lender. There is no guessing game as there is just one amount on one mortgage secured on one property and the choices are all yours. The rate of return starts and stays the same from day one to the end (term). The monthly payments go directly to you. Your lawyer prepares and registers the mortgage document in your name at land titles with all the specific details before one Looney is advanced to the borrower.
Risk? All investments carry a risk. You make the decision as to how much risk you want to take for your return on the investment. If you rely on the tax-assessed value of a property along with a certified appraisal of the same property, then you can be fairly certain as to the current market value (or, ask any experienced realtor about the market value). Once you are comfortable with the value of the property then you can assess the amount of the mortgage money you would want to securely lend against it. If a property were worth $375,000, then a first mortgage of $125,000 would be well secured, and a second mortgage of $15,000 behind the first would also be well secured. A first mortgage of $500,000 secured against a property valued at $2 million dollars is well secured, as would a second mortgage of $75,000 registered on the same property. Whatever amount you are comfortable with investing in a mortgage is secured to the percentage of what you determine is the value of the property. If your mortgage amounts to no more than 50 per cent of the current property value then the risk factor should be comfortable.
Borrowers pay all the costs to prepare, execute and register the mortgage documents. The borrower is willing to pay above bank rates for a number of reasons. Mainly because the qualifying process is quick, easy and usually short term. The borrower will pay 7 to 12 per cent interest for the short term mortgage financing (most private mortgage are for one year term). Some borrowers do not want to go through the bank qualifying process (they’ll pay extra for “privacy”). Some banks do not offer an equity-based mortgage, no matter how much equity. Some banks won’t approve a mortgage on a clear title property until you can prove enough income to service the new debt. Banks are limited to what they can approve. There are bank acts and government rules and regulations to guide their approval process.
Do not confuse investing in a mortgage with investing in a “mortgage company.” A mortgage company pools their funds from investors and the company executives (salesmen?) make the decisions as to the risks. They may charge the borrower a big fee (that’s where they make their money), take a big risk (the bigger the risk, the bigger the fee) with your money and they can walk away when the mortgage (usually a lot of high risk mortgages) goes into default. The stories are tragic when investment companies walk away from their investors, who suffer the loss on high-risk investments they were not aware of. Leaving your investment decisions up to someone else may not be your best decision.
Again, if banks make large profits from secured mortgages then you know it must be a good investment. Why not you? It’s not complicated.
Submitted by Richard Watt,
Sunco Mortgage Corporation
Topics: Real estate information |