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Okay, it's a no-brainer to see why people take out mortgages--fixed cost over time even while inflation rages, and colossal tax breaks to boot.
But why do investors take the chair on the other side of the table? Your benefit--marginal to begin with--diminishes rapidly over time and the underlying asset may be crumbling. Why would anyone buy something which promises to be worthless as time goes by? Are there tax benefits to investors too? Or is this something which is just foisted upon unsophisticated 401k-type investors?
They buy the mortgage loan at a discount and have calculated that the present value of the stream of payments is higher than the discounted price they paid.
I don't know their business but it makes sense to buy them considering what the 10 bond rate is. Yes they might be 30 year mortgages, but they rarely go thirty years. I think I heard one time that the average length for a mortgage to run is about 7 years.. Owners typically move up to a bigger house or move, and the loan is paid off well before the 30 years.
Location: East of Seattle since 1992, 615' Elevation, Zone 8b - originally from SF Bay Area
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Even at 4% interest, there is a lot of money to be made on a $500,000 mortgage. You can't get that at the bank. Our home has increased in value nearly 20% since the first of the year, so for now, mortgages (at least in our area) are a good investment.
Okay, it's a no-brainer to see why people take out mortgages--fixed cost over time even while inflation rages, and colossal tax breaks to boot.
But why do investors take the chair on the other side of the table? Your benefit--marginal to begin with--diminishes rapidly over time and the underlying asset may be crumbling. Why would anyone buy something which promises to be worthless as time goes by? Are there tax benefits to investors too? Or is this something which is just foisted upon unsophisticated 401k-type investors?
I am not sure what you mean that the "benefit diminishes rapidly over time" unless you are referring to less interest paid over time paid on an amortized loan. If that, then I am not sure you know how these loans work, the interest paid on each payment is on the unpaid balance, plain and simple. So naturally, over time there is less interest paid but you have less of your money outstanding because the borrower has been returning your principal over time as well. That money is free to reinvest in other mortgages.
I wrote (2nd) mortgages in the late 90's and they worked out great. I was collecting between 10% and 12% and never had any defaults. Last year I spent quite a bit of time in Texas working with investment groups and I was trying to provide some financing for some small projects there. It was tough to compete with banks that were basically not paying anything for their cash and there was a little discrimination in Texas against me, which, for the record I do not mind except in this case, the better deals seemed to be steered elsewhere. I do intend to get into it when interest rates rise but back in California as there are more opportunities for me there. If you are white Christian male there are some good opportunities in Texas.
Why does anyone buy treasury?
Apparently people does buy treasury.
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