RISK VS REWARD FOR MORTGAGE INVESTMENTS Should You Add Mortgage Investments to Your Portfolio?
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Corporate bonds carry the risk of strength and integrity of the corporation that issued the bonds. Independent rating services such as Standard and Poor’ s and Moody’ s have been shown to misjudge the security of many corporate bonds – whether through conflictsofinterest or simple mistakes. Even without misjudgments, the price of a corporate bond fluctuates based on the performance of the company, its industry, and the economy overall. In addition, as interest rates rise, the value of the bonds decrease.
The risks that a mortgage investor faces primarily involve the borrower and the underlying real estate. An investor may choose to work with a borrower with less than perfect credit if there is sufficient equity in the property that it is worth the risk. Alternatively, a property may be marginal, but the borrower has excellent credit. These are the main factors determining the interest rate that an investor can expect on his mortgage investment.
Another factor in determining the rate on a mortgage is the competition for these types of investments. In the past, they were considered one of the best kept secrets in investing. No longer. The competition for mortgage investments has heightened to where lenders are competing for loans. This, in turn, drives down the rates. Good for the borrowers; not so for the investors. On the positive side, what once was considered an illiquid investment has risen to a semiliquid investment. Although there is not a trading market for mortgages as there is for stocks and bonds, new companies have come to the marketplace in search of