Buy mortgages: Risk and profit

2008-10-28 15:40:28

( Financial )



UNDERSTAND MORTGAGES

The mortgage is a security for the loan that the lender makes to the borrower. Given the large sum of money involved in financing a property, a mortgage lender will usually want security for the loan that will provide a claim upon that security. A mortgage accomplishes this security.

Arranging a mortgage is seen as the standard method by which individuals and businesses can purchase residential and commercial real estate without the need to pay the full value immediately.

PROFIT IN TAKING MORTGAGE RISKS

After lending money to borrowers in exchange of mortgages, for various reasons lenders choose to sell mortgages. One reason is if the lender has an urgent need for cash. Or sometimes the lender simply wants to be relieved of the stress of managing mortgage related issues and mortgage risks.

Because of these risks people that buy mortgages are able to purchase the mortgage notes cheaply, and therefore able to make profit by selling the property at a higher rate.

Lenders can either sell mortgages in full or in part. To buy mortgages in part means the mortgage belongs to the buyer for a specific period of time only. If you buy mortgages in part the lender receives a lump sum amount from you and in exchange of that you are allowed to collect the payments from the borrower. After the period is over, the lender can go back to collecting the usual periodic payments from the borrower.

To buy mortgages in full means the mortgage is completely transferred to the buyer. When you buy mortgages in full you can make profit by paying an amount lower than the worth of the property and sell it at the same or higher price.

If the borrower is paying regularly and honoring the contract, the mortgage buyer faces very little risk. However, if the borrower is a defaulter or is not able to abide by the contract due to any reason, the mortgage buyer is forced to accept the loss.


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