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Posted by Brosnan Realty Group, Inc on 4/4/2021

Image by Ulrike Mai from Pixabay

If you're considering getting into the world of real estate investing, there are some basic terms that are important to understand. Buying and selling property is, of course, one way to invest, but there are other investments that offer favorable returns. However, it can sometimes be difficult to master the confusing alphabet soup of investment opportunity.

Packaged investment products include the Asset-Backed Security (ABS) and a Collateral Debt Obligation (CDO). In some ways, they are similar; each is typically bundled as a group investment for marketing purposes. Financial return is realized as payments are made by the pool of consumers included in the group. 

The ABS evolved historically, beginning in the 1980s, with the lender practice of bundling mortgage-backed securities for resale, primarily to other institutions. Today the practice continues, but mortgage debt is classified as a CDO, with specific real estate as the collateral. It is a specialty designation under the umbrella of asset-backed securities. The breakdown can be complex, and terms are sometimes confusing.

Financing that comprises CDO debt includes all the underlying characteristics of the ABS, in addition to the specialized assets of both commercial and residential Mortgage-Backed Security (MBS) or REIT (Real Estate Investment Trust) debt. A unique type of CDO that only includes mortgages is known as a CMO, referring to Collateralized Mortgage Obligation. 

Most investors really don't need to know more, but there are other designations that are commonly used:

  • A CLO is the term for Collateralized (Bank) Loan Obligation;
  • A CBO designates a Bond Obligation;
  • Credit-backed debt is sometimes referred to as synthetic CDO to distinguish it from cash-backed debt.

Various types of CDO debt are batched into three (or more) classes, known as tranches, with varying degrees of risk and return. Although the maturity level may be the same, an Equity Tranch investment offers the highest potential return but bears the lowest credit rating. A less-risky Senior Tranch boasts a higher credit rating, and the Mezzanine Tranch is in the middle.

Typically, an ABS investment package comprises credit card debt, student loan debt, home equity loans, auto loans, and large sum debt-repayment contracts for other goods, with no mortgages in the package. 

An investor in either an ABS or CDO earns a return, in part or in full, as the pool of debt is repaid by the individuals whose loans have been pooled. The risk of default is spread over the spectrum of loans, and investor risk is assessed, largely in proportion to the number and type of loans included in the package. 

These various types of investment packages are usually marketed only to institutions, rather than to individual investors, however there are ways for individual investors to purchase shares through the investment firm.





Posted by Brosnan Realty Group, Inc on 4/26/2020

Image by Jojje from Shutterstock

Many people own homes through a mortgage agreement. Traditional mortgages are primarily fully amortized or gradually paid off with regular payments over the lifetime of the loan. Each payment contributes to both the principal and the interest.

A balloon mortgage is a short-term home loan with fixed-rate monthly payments that only take care of accrued interest on the loan for a set period. It also has a large “balloon” payment to cover the rest of the principal.

The payment plan is based mainly on a fifteen- or thirty-year mortgage, with small monthly payments until the due date for the balloon payment. These low regular payments partly cover the loan but require paying the remainder of the unpaid principal as a lump sum. Selling the house or refinancing the balloon loan before the payment is due is how most buyers approach this situation.

Key Issues with Balloon Mortgages

Lenders present a deadline by which the balloon payment is due (three- to seven-year period). The enormous amount is often more than borrowers can easily handle at once.

Paying only interest on a loan does not allow equity to build. Many homeowners use equity as a means to complete home improvements or other projects. Building equity also helps homeowners when it comes time to sell their home because a traditional mortgage reduces over time. 

Why People Opt for Balloon Loans

It is possible to refinance a balloon mortgage or sell the property before the balloon payment is due but it can be difficult to do so. A dry housing market, job loss, or low credit score are potential obstacles. Lay-offs and depressed home values can trap buyers in their balloon loans. Without the option to sell, refinance, or fulfill their balloon payments, borrowers may end up in foreclosure.

The One True Strategy

Traditional loans are generally safer than balloon mortgages. To keep housing costs at a minimum, use a balloon mortgage if you are sure you can exit before the balloon payment comes due. Otherwise, it is best to remain in the realm of traditional loans.

Review the pros and cons of taking a balloon loan before committing to it. Speak to your financial planner or realtor for professional guidance.




Tags: Mortgage   homebuyers   Financing  
Categories: Financing  




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