How to Invest in Mortgages
If you are interested in diversifying your investment portfolio, understanding how to invest in mortgages can significantly increase your return without ticking up your exposure to risk as much as some other investment vehicles. Because of the low interest rates that banks are offering for products like savings accounts and certificates of deposit, making these conservative items a major part of your portfolio is a mistake. You’ll see your accounts slowly creep upward in value, but you’re also likely to see your future spending power dwindle, as inflation moves more quickly than your investments.
The Basics on How to Invest in Mortgages
Placing your money into mortgages as a private investor makes a considerable amount of sense. First of all, as a private investor, you can ask for (and receive) a higher rate of return than the banks are making from their traditional mortgage clients. The banks are offering mortgages at historically low rates, but their requirements for borrowers are historically tight. Borrowers have to be able to prove verifiable income and maintain a high credit score, in addition to having 20 percent of the home’s value to put as a down payment. The credit score and income verification requirements have come into play since the housing collapse five years ago, and they are keeping many potential home buyers out of the real estate market. Even people with 30 or 40 percent of the home price in savings as a potential down payment often cannot provide the income verification that the banks want because they are self employed. Because these borrowers are arguable greater risks, though, you can charge a higher interest rate.
Second, with a private mortgage you do not have to wait as long as banks do to collect their money. Generally, home mortgages are issued with a 15 or 30 year term through banks, renewable after 10 years. Most private mortgages have a term between six months and two or three years, though, which means you have your money back much sooner than the banks do. Amansad Financial Services has many clients who are looking for funding for their real estate purchases because they cannot qualify through a traditional bank. However, the fact that they have such a high down payment set aside often means that they have changed their financial situation for the better, but they are waiting for negative items to age to the point where they fall off their credit history.
To sum up, investing in mortgages as a private lender means that you can get a higher rate of return than the banks do while getting your money back much sooner than they do. Another positive element in this process is that you can choose the nature of the mortgage in which you invest. One popular option is a first mortgage. This investment gives you the senior lien on a property, assuming that the title is clear at the sale. Given the number of mortgage defaults that have happened over the past few years, some people think that mortgages are risky. However, Amansad Financial Services helps you with the vetting of your potential borrowers. While it is impossible to eliminate the risk of default completely (without risk, there wouldn’t be much reward at all), the fact remains that people do not want to go through foreclosure, and they will generally take any steps possible to meet the requirements of their mortgage. If a borrower has saved up 30 or 40 percent to put down — typically a requirement for a private mortgage — then you can generally rest assured that he has also figured out how to make reliable payments.
Here’s how the process works. First, you contact one of our mortgage investment specialists here at Amansad Financial Services. We will go through your current investment situation and come up with a list of potential borrowers with whom to connect you. We will help you through the due diligence process so that you end up with the right level of risk (and reward) for your investment needs.
If you are willing to accept a higher level of risk (with a higher rate of return), take a look at a second or third mortgage. You won’t have the senior position on the loan in terms of default, but you do get a higher interest rate for your money. People often take out additional mortgages for everything from buying a vacation home to sending a child to college. Open mortgages, in which the borrower has the right to request additional principal, also increase your potential rate of return in comparison to closed mortgages, which have set principal amounts. Contact us today at Amansad Financial Services when you are ready to consider adding mortgage investment to your portfolio.