See: Mortgage.
You’ve got a few hundred thousand bucks in the bankie-pie and you’re looking to invest the funds. You decide to go into the mortgage business.
You go through all the licensing and legal procedures to become an official mortgage lender in your state. Once all the paperwork is filed and approved, you’re ready to loan cash. You still just have the few hundred thousand bucks to make the mortgage. You’re a legal mortgaging company...just not a very well-capitalized version. But you’ve gone this far, so you decide to push ahead.
You basically have enough for one mortgage. But what if that one mortgage doesn’t pay? If they default, you lose everything.
Even if you think mortgages are good investment, it makes sense to diversify. Instead of directly loaning the money out for a single mortgage, you can invest those funds in a Mortgage Cash Flow Obligation. It lets you participate in a bunch of mortgages at once.
Buy an MCFO and you get access to revenue generated from a pool of mortgages. It’s considered a pass-through investment, with the payments from homeowners passing through to the holders of the associated MCFO. So instead of payments from a single client in your thread-bare mortgage business, your payments are derived from a group of similar mortgages. An individual default doesn’t dry up your entire return.
The MCFO comes with its own downside. You don’t actually have a claim on the underlying property. If you loan money out for individual mortgages, you can respond to any defaults with foreclosure and take possession of the house. You don’t have that recourse with an MCFO.
Related or Semi-related Video
Finance: What is Interest Only Mortgage?17 Views
Finance allah shmoop what is an interest only mortgage Well
simply put it's when you only pay the rent on
the dough you borrowed you don't pay down the principal
you owe like if you have a three hundred thousand
dollars mortgage at six percent interest you're paying eighteen grand
a year to rent that money in six percent times
three hundred rands eighteen grand a year But the principal
you borrowed is likely due in thirty years So in
theory anyway if it were a normal mortgage you'd want
to pay down the principal little bit a month as
you go along like averaging ten grand a year in
principle pay down over thirty years That's times ten grand
right three hundred grand their total owning your home at
the end yeah yeah priceless that's what holmes work So
why would you want an interest only mortgage Well for
one thing the monthly payments or less so maybe you
could afford morehouse If on a thirty year three hundred
thousand dollar loan at six percent you're paying interest only
while you're writing a check each month for eighteen thousand
divided by twelve or fifteen hundred bucks maybe that's all
You can afford well the extra five hundred bucks arm
or you'd right toe pay down your principles Just not
something you can really do right now Maybe after three
years of scrimping and saving well you'll be able to
start paying down that principal reducing risk and making life
easier all the way around But right now you can't
afford it so the only thing you can do is
do the interest only dance Well the other reason you
might want an interest only mortgages that interest costs are
tax deductible Principal pay down costs are not so if
in a given mortgage payment of say eighteen hundred bucks
a month where three hundred of it is principal pay
down and fifteen hundred of it is interest well on
ly the fifteen hundred is tax deductible That three hundred
of pay down is not And if you're a forty
percent taxpayer the government is essentially picking up the tax
savings on the fifteen hundred times a forty percent at
six hundred dollars in interest You're paying such that they
quote feel unquote like the fifteen hundred is really only
about nine hundred a month in cost to you the
three hundred bucks and principal paydown feels like a full
three hundred dollars So some people seeking tio optimize their
tax deductions live in the world of interest only mortgages
and let the government for a change You know work 00:02:26.24 --> [endTime] for them How's that feel same all Take it
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